oversight

Potential for Reducing Hospital and Administrative Costs Under the Civilian Health and Medical Program of the Uniformed Services

Published by the Government Accountability Office on 1971-04-16.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

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    REPORT TO T%                             /z
    COMMITTEE  ON APPROF’RlATIONS
    HOUSE OF REPRESENTATIVES



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                                  LM095568



    Potential For Reducing
    Hospital And Administrative
    Costs Under The Civilian
    Health And Medical ,Program
    Of The Uniformed Services 8-73374z
    Department of Defense




    BY THE COMPTROLLER GENERAL
    OF THE UNITED STATES
                            COMPTROLLER      GENERAL      OF     THE      UNITED   STATES
                                           WASHINGTON.      D.C.       20546




  B- 133142



  Dear    Mr.   Chairman:

           The General     Accounting     Office    has made a review       of costs re-
  lated to care furnished        by hospitals     under   the Civilian   Health   and Med-
  ical Program      of the Uniformed        Services.      The review    was made in ac-
  cordance     with your request      of October      20, 1969.     This is our third     re-
  port pursuant     to this request.       We expect     to issue a summary        report
  on the results     of our review     shortly.

          We have not obtained           written     comments     from   the Department         of
  Defense    on the matters        included      in the report.      We have discussed        these
  matters    with officials      of the Office      for the Civilian    Health      and Medical
  Program       of the Uniformed        Services,      the B.lue Cross     Association-    -
  prime    contractor    - - and four Blue Cross           Plans- - subcontractors-      -where
  audit work      was performed.

         We plan to make no further        distribution   of this report    unless
  copies   are specifically   requested,     and then we shall make      distribution
  only after   your agreement      has been obtained    or public   announcement
  has been made by you concerning          the contents   of the report.

                                                                 Sincerely         yours,




                                                                   Comptroller              General
                                                                   of the United            States
  F/
& The Honorable        George       H. Mahon
  Chairman,      Committee          on Appropriations                  w Q-2
  House     of Representatives




                        50TH      ANNIVERSARY            1921-         1971
COMPTROLLERGENERAL'S                                  POTENTIAL FOR REDUCINGHOSPITAL AND
REPORTTO THE COMMITTEE                                ADMINISTRATIVE COSTSUNDERTHE CIVILIAN
ONAPPROPRZATIONS                                      HEALTH AND MEDICAL PROGRAMOF THE
HOUSEOF REPRESENTATI?%'S                              UNIFORMEDSERVICES
                                                 1    Department of Defense B-133142  s"


DIGEST
------

WHYTHEREVIEWWASMADE
               The Chairman of the Committee on Appropriations, House of Representa-
               tives, asked the General Accounting Office (GAO) by letter of Octo-



               cussed on page 6.

               This report--GAO's third in this            area--deals with three matters       iden-
               tified by the Chairman as topics            of special interest.

       eJ          --Charges made by hospitals       for    care furnished   to beneficiaries
                      under the program.

           -       --Related   administrative    costs.

       -           --Audits of payments to hospitals          and of administrative     costs of the
                      program.

               Also GAOexamined into the overall rise in hospital costs and the ef-
               forts made to contain them, since they directly influence program costs.

               Written comments have not been obtained            from the Department of Defense
               on matters discussed in this report.

FINDINGSAND CONCLUSIONS
               Increased hospital charges, along with such other factors as expanded
               benefits and the addition of new classes of eligible  beneficiaries
               (authorized by the Military Medical Benefits Amendments of 1966, Pub.
               L. 89-614), and increased use of the program have significantly     in-
               creased costs of the program since its inception in 1956.

               The major increase occurred in recent years when costs for hospital
               care increased from $46.2 million  in 1966 to $134.5 million in 1969.
               {See pp. 8 to 13 and exhibit A.)


Tear       Sheet
      Comparison of hospi taZ charges

      Comparison      of hospital      claims     paid under this         program with    amounts
      paid under several         medical     insurance     programs       and review    of hospital
      billing    procedures       showed that      program    beneficiaries        were generally
      charged    the same for comparable             care and services          as were other     hos-
      pital   patients.

      GAO found that,         although    hospital   charges    had        been consistently         ap-
      plied,  the total         charge  per claim    for insured           patients,    including
      program   beneficiaries,         had exceeded      that for         uninsured    patients,      pri-
      marily  because       of a longer      average   length   of        hospital   stay.       (See
      pp. 14 to 20.)

      The average       length    of hospital     stay for maternity        cases under the pro-
      gram differed        widely     among hospitals        and among geographic        areas.      The
      average    length      of stay for maternity           cases under the program         was longer
      than that     for similar        cases in military         hospitals.    Significant        savings
      to the program         could be made if,        without     reducing  the quality         of care,
      the lengths       of stay for maternity           cases could be brought         more into       line
      with the experience           of those hospitals         where the lengths        of stay are
      shorter.

      GAO is     not     in a position     to say whether  a shorter   length               of stay     is
      feasible         or attainable.       (See pp. 15 and 19 to 23.)

      Hospitals        generally         charge less than cost for maternity                 care but re-
      cover their          total      costs by charging        more than cost for other             services.
      It appears         that     hospital      charge systems        are designed,      in general,        to
      recover      total       operating       costs rather      than costs for specific            services.
      As a result,           the program        pays less than cost for maternity                cases,
      which     constitute         about one third          of the hospital      claims     under the pro-
      gram.      In contrast,            the Federal     Employees       Health  Benefits       Program re-
      ceived     less advantage             from maternity        cases because,      during     the period
      1966-69,       only 11 percent            of hospital       admissions    under the program
      were for such care.                  be     pp. 17 t0 19.)

      Total    payments     to hospitals       were significantly             affected       by hospital
      reimbursement        agreements      between     participating           hospitals       and the Blue
      Cross Plans administering             the program.           These agreements            generally
      provide     that the hospitals,           in consideration            of the Plans'        making
      prompt payments         and thereby      minimizing        collection         efforts     and eliminat-
      ing bad debts,        accept    less than their           normal      charges      for services
      rendered      to the Plans'       subscribers.          The benefits         of these agreements
      were given to the program             by 39 of the 52 Blue Cross Plans which pro-
      cess program       claims.      In fiscal      year 1968 this            resulted      in the pro-
      gram's    paying     about $2.3 million          less than would have been paid with-
      out the benefits         of these agreements.

      The 13 remaining  Plans reimbursed                  hospitals     for program    claims         on dif-
      ferent bases than those   used for                the Plans'      private   subscribers          claims.


.a.
         The program   could have saved at least   $850,000  annually,  GAD estimates,
         had the Plans been able to extend    to the program    the more favorable
         reimbursement   rates.   (See pp. 24 and 25.)

         Rising         cost of hospital            care

         Salaries          account   for almost   two thirds  of hospital                            operating          expenses,
         The rise          in salary    expense is the major reason       for                        the recent          dramatic
         increase          in the cost of hospital      care.

         The Nation's          community      hospitals        experienced        an average       payroll     in-
         crease      of 74 percent         during      the period        1965-69,    mainly     because      of in-
         creased       salary      expenses     and increased          hospital     work forces.           Hospital
         employees        have traditionally              been underpaid.          Due to labor        and wage
         legislation          and to the effect             of unionization,        hospital      employees'        sal-
         aries     have increased          significantly.            The increased        hospital       work forces
         have resulted           in more hospital            employees      per patient.        (See pp. 26 to 31.1

         Other         contributory       factors      to       rising      hospital       costs      are

               --new     high-cost      services       now available              in    community        hospitals          and

               --the   increase  in the             number       of services           customarily          provided.
                   (See pp. 32 to 35.)

         Extent         that hospital        costs might be reduced

         Medical   officials    believe  that    reducing   unnecessary hospital  admissions
         and shortening      the lengths   of hospital    stay to the minimum number of
         days needed for good quality         care can reduce medical    care costs signif-
         icantly.

         Attempts            currently        are being made to control          unnecessary       hospital       ad-
         missions            and lengths         of stay,   but current     patterns     of health        insurance
         provide          little       incentive      to discourage     unnecessary      hospitalization.

        Studies    indicate   that    the prepaid       group practice        method for delivery
        of medical      care may be more economical            than the more common fee-for-
        service    method.    The prepaid       group practice        method,     which emphasizes
        preventive      care, motivates      physicians      to limit     hospital     use to the
        minimum consistent       with    good care.        The fee-for-service         method  lacks
        similar    incentives    to limit     hospital      use.

        Other methods      being used to control         hospital                        costs     are      discussed     in
        chapter    5.   Serious    problems   exist    that must                         be solved          if the attempts
        to control    rising    hospital    costs   are to have                          a significant            impact.
        (See pp. 39 to 60.)

        Reasonableness of ahrinistrative                            costs

         Payments by the Office                for the Civilian      Health   and Medical                        Program          of
         the Uniformed  Services               to selected    fiscal   agents    for costs                       incurred           in

Tear   Sheet

                                                            3
    processing         hospital         claims     were,       for     the     most     part,        allowable         under
    contract        provisions.

    The Office,   however,   has exercised        limited       managerial   control,    and
    opportunities    for cost reductions        had not been identified            or had
    not been acted upon by responsible            officials.         There is potential      for
    substantial   reductions    in administrative            costs.     (See pp. 61 and 62.)

    Savings    would have been achieved          if the Office     had eliminated    the claims
    review    procedure   of the Blue Cross Association--a            prime contractor--
    since   the procedure    essentially        duplicates   reviews   previously    made by
    Blue Cross Plans--the       subcontractors.

    Investigations       should    have been                 made into   the wide variances     in adminis-
    trative      claim rates    paid to the                  52 Plans.     The rates  ranged  from $1.25
    to $8.64 per claim during          fiscal                 year 1968.      (See 61 to 69.)

    GAO believes          that    further         savings       may be possible                 if    the     Office      were
    t0

         --take    advantage       of differences       in certain    geographical     areas between
             the administrative'costs             per claim   charged   by the Blue Cross Plans
             and those charged        by Mutual      of Omaha Insurance       Company,    and

         --award     contracts for paying                   hospital          claims      on a competitive                basis.
            (See    pp. 66 and 67.)

    Adequacy of audits

    The Department        of Health,      Education,      and Welfare's      Audit    Agency audits
    of selected      fiscal    agents     that we reviewed         were adequate      for determining
    the allowability        and allocability           of administrative       costs,     but the scope
    of the audits        and the time spent          on them were too limited           for the audits
    to function      as an effective         tool    of management       for such matters        as the
    reasonableness        of administrative          costs and hospital        charges,      the eligibil-
    ity   of beneficiaries,         and the efficiency         of fiscal     agents.       (See pp. 70
    to 72.)

RECOMVENDATIONS
              OR SUGGESTIONS

    The Executive           Director,       Office          for the          Civilian      Health           and Medical        Pro-
 ?J gram of the          Uniformed        Services,           should         consider

         --looking    into      the      differences   in certain     geographical     areas between
             the administrative              costs per claim   charged     by Blue Cross and those
             charged  by Mutual            of Omaha and changing      fiscal    agents where it ap-
             pears advantageous              to do so;

         --requesting        proposals           from other   commercial                  insurance           firms     to act
             as fiscal      agents    for        the program;
                --investigating        the causes for differences       in operating       efficiency
                    which     appear to exist      among fiscal  agents   and taking     necessary                      ac-
                    tion to improve       operations    of the less efficient      agents;

                --attempting            to obtain      the more       favorable       Blue   Cross reimbursement
                    formulas        for paying        hospitals       in areas       where   the program    is not
                    obtaining         them;


             3 --discontinuing
                   Cross Association;
                                      the           duplicate       claim   review     procedure    of   the    Blue
                                                                                                                       c< s-x-7

         f      --arranging      with Department     of Health,   Education,                    and Welfare's            z-
     /             Audit    Agency officials     for an expansion     of the                   audit effort       and
                   scope of review       of the program;    and

                --initiating     a pilot    program     to determine   the feasibility                     and econ-
                    omy of paying    program     claims   on a prepaid    group practice                    basis.
                    (See pp. 74 and 75.)


bUTTERi FOR CONSIDERATIONBY THE COMflTTEE

             Reductions           in the lengths     of hospital     stay would have a significant
             effect    on       Federal  expenditures       for hospital     care.     Therefore     the
             Committee          may wish to consider        the need for an analysis           of the factors
             affecting          lengths  of stay,      to identify    steps   that    can be taken to re-
             duce them          without  sacrificing      the quality      of medical     care.     (See pp.
             21 to 23,          40 to 44, and 75.)




Tear Sheet



                                                                5
                        Contents
                                                               Page

DIGEST                                                           1

CHAPTER
  1      INTRODUCTION                                            6

  2      INCREASED
                 COSTANDUSE OF HOSPITALSERVICES
         UNDER CHAMPUS                                           8
             Increased benefits    and new classes      of
                beneficiaries   under CHAMFUS                    8
             Increased use of CHAMPUS    by benefi-
                ciaries                                         10

  3      COMPARISONOF HOSPITALCHARGESFORCHAMPUS
         BENEFICIARIESWITH CHARGESFOROTHERPRO-
         GRAMSANDUNINSURED  PATIENTS                           14
             Comparison of hospital      charges               15
                  Comparison of hospital      charges and
                    lengths of stay at individual       hos-
                    pitals                                      15
                  Comparison of hospital       charges for
                    insured and uninsured patients              16
                  Hospital   charges for maternity
                    care                                        17
                  Comparison of hospital       charges and
                     lengths of stay in different      geo-
                    graphic regions                             19
             Lengths of hospital     stay for maternity
               cases                                            21
             Reimbursement methods used for payment
               of CHAMPUShospital       claims                  24

  4       RISING COSTOF MEDICALCAREIN CIVILIAN HOS-
          PITALS                                                26
              Effect of salaries     on hospital     costs      28
                    Labor and wage legislation                  29
                    Employee unionization                       29
                    Increased hospital     work force           30
              Increase in hospital      services                32
                    New high-cost   hospital    services
                       available  in community hospitals        32
CHAPTER                                                              Page
                    Increase in number of services
                       customarily     provided to hospi-
                       tal patients                                  34
               Prospects for future hospital       costs             36
                    Population     growth                            36
                    Availability      of hospital beds               36
                    Third-party     health care insur-
                       ance                                          37

  5       EXTENT THAT HOSPITAL COSTS MIGHT BE REDUCED                 39
              Current hospital        delivery     system milk
                tates against containing            costs            39
              Need for hospitalization                               40
              Length of hospitalization                              42
              Potential      methods for containing         or re-
                ducing costs                                         45
                   Service-sharing        agreements                 45
                   Utilization      review committees                47
                   Pre-admission-testing           programs          49
                   Employee incentive          programs              50
                   Reimbursement incentive            programs       52
                   Prepaid group practice                            54
                   Planning and coordination             of hos-
                      pital    services                              58

  6       REASONABLENESS     OF COSTS PAID FOR ADMINIS-
            TRATION OF CHAMPUS                                       61
              Control over performance of hospital
                 fiscal    agents needs improvement                  61
                    Continued rise in costs of processing
                        CHAMPUSclaims                                62
              Need for competition      and incentives   to
                reduce cost of processing        claims              66
                    Incentive-type    contract   needed              67
              Blue Cross Association       claims review
                procedure                                            68

  7       ADEQUACYOF REVIEWS OF FISCAL AGENTS                        70
CHAPTER

   8       CONCLUSIONS, RECOMMENDATIONS,AND MATTERS
             FOR CONSIDERATION BY THE COMMITTEE                73
               Conclusions                                     73
               Recommendations                                 74
               Matters for consideration by the Commit-
                 tee                                           75
   9       SCOPEOF REVIEW                                      76

EXHIBIT

   A       Total   hospital   payments made for   CHAMPUS      81

   B       Average total  charges for maternity  claims
             paid during the 6-month period ended
             June 30, 1969--Colorado  Hospital  Service,
             Denver, Colorado                                  82

   C       Average    total  charges for maternity claims
             paid    during the 6-month period ended
             June    30, 1969--Blue Cross of Southwest
             Ohio,    Cincinnati,   Ohio                       83

   D       Average total  charges for maternity   claims
             paid during the 6-month period ended
             June 30, 1969--Blue  Cross of Virginia,
             Richmond, Virginia                                84

   E       Average total   charges for maternity    claims
             paid during the 6-month period ended
             June 30, 1969--Hospital      Service of Cali-
             fornia,  Oakland, California                      85

APPENDIX

   I       Letter     dated October 20, 1969, to the Comp-
              troller     General from the Chairman, Commit-
              tee on Appropriations,      House of Represen-
              tatives                                          89
APPENDIX

   II      Fiscal agents processing inpatient                     hospital
              claims for CHAMPUSby geographic                     areas of
              responsibility                                                     91

 III       Diagnostic      cases selected          for   review                  94

                                  ABBREVIATIONS

CHAMPUS Civilian         Health      and Medical     Program of the Uniform
        Services

GAO        General      Accounting      Office

HEWAA      Health,      Education,      and Welfare       Audit     Agency

OCHAMPUSOffice for the Civilian   Health                  and Medical        Program
           of the Uniformed Services
COMPTROLLERGENERAL'S                                  POTENTIAL FOR REDUCING HOSPITAL AND
REPORTTO THE COMMITTEE                                ADMINISTRATIVE   COSTS UNDER THE CIVILIAN
ON APPROPRIATIONS                                     HEALTH AND MEDICAL PROGRAM OF THE
HOUSEOF REPRESENTATIVZS                               UNIFORMED SERVICES
                                                      Department   of Defense B-133142


DIGEST
------

WHYTHE REVIEW WASMADE

    The Chairman of the Committee   on Appropriations,       House of Representa-
    tives, asked the General Accounting    Office      (GAO) by letter of Octo-
    ber 20, 7969, to make a comprehensive                     review   of the Civilian   Health
    and Medical   Program of the Uniformed                   Services.     (See app. I.)    Modi-
    fications   to the request,  agreed   to                by the Chairman's    office,  are dis-
    cussed on page 6.

    This     report--GAO's    third   in this           area--deals          with    three       matters         iden-
    tified      by the Chairman     as topics           of special         interest.

         --Charges   made by hospitals            for    care     furnished         to     beneficiaries
            under the program.

         --Related    administrative         costs.

         --Audits    of   payments     to   hospitals       and of        administrative            costs        of    the
            program.

    Also     GAO examined   into   the overall             rise in hospital        costs            and the           ef-
    forts     made to contain    them, since             they directly      influence               program           costs.

    Written    comments have not been obtained                     from       the   Department             of   Defense
    on matters    discussed  in this report.


FINDINGS AND CONCLUSIONS
    Increased      hospital    charges , along with such other            factors      as expanded
    benefits     and the addition      of new classes       of eligible        beneficiaries
    (authorized      by the Military      Medical   Benefits     Amendments        of 1966, Pub,
    L. 89-614),       and increased    use of the program        have significantly           in-
    creased     costs of the program       since  its inception         in 1956.

    The major increase     occurred  in recent                   years when costs     for             hospital
    care increased    from $46.2 million    in                  1966 to $134.5  million                in 1969.
    (See pp. 8 to 13 and exhibit       A.)
Conpuxisonof           F.ospitaZ dmqes

Comparison      of hospital      claims     paid under this         program   with    amounts
paid under several          medical    insurance     programs       and review     of hospital
billing    procedures       showed that      program    beneficiaries        were generally
charged    the same for comparable             care and services          as were other     hos-
pital   patients.

GAO found that,         although    hospital   charges    had        been consistently         ap-
plied,  the total         charge per claim     for insured           patients,    including
program   beneficiaries,         had exceeded      that for         uninsured    patients,      pri-
marily  because       of a longer      average   length   of        hospital   stay.       (See
PP. 14 to 20.)

The average         length    of hospital     stay for maternity     cases under the pro-
gram differed          widely     among hospitals     and among geographic         areas.      The
average      length      of stay for maternity        cases under the program          was longer
than that       for similar        cases in military      hospitals.    Significant         savings
to the program           could be made if, without         reducing  the quality          of care,
the lengths         of stay for maternity         cases could be brought        more into        line
with     the experience         of those hospitals      where the lengths        of stay are
shorter.

GAOis      not     in a position      to say whether a shorter              length    of stay     is
feasible         or attainable.       (See pp. 15 and 19 to            23.)
Hospitals        generally     charge     less than cost for maternity             care but re-
cover their         total   costs by charging         more than cost for other            services.
It appears that hospital               charge systems       are designed,      in general,        to
recover      total operating         costs    rather    than costs for specific           services.
As a result,          the program     pays less than cost for maternity                cases,
which     constitute       about one third         of the hospital     claims      under the pro-
gram.      In contrast,        the Federal       Employees     Health  Benefits       Program re-
ceived     less advantage         from maternity        cases because,      during     the period
1966-69,       only 11 percent        of hospital       admissions    under the program
were for such care.              (See PP. 17 t0 19.)

Total payments        to hospitals       were significantly             affected       by hospital
reimbursement       agreements      between     participating           hospitals        and the Blue
Cross Plans administering            the program.           These agreements             generally
provide    that   the hospitals,         in consideration            of the Plans'         making
prompt    payments      and thereby     minimizing        collection         efforts      and eliminat-
ing bad debts,        accept   less than their          normal       charges       for services
rendered     to the Plans'       subscribers.          The benefits          of these agreements
were given      to the program       by 39 of the 52 Blue Cross Plans which pro-
cess program      claims.      In fiscal      year 1968 this            resulted       in the pro-
gram's    paying    about $2.3 million          less than would have been paid with-
out the benefits         of these agreements.

The 13 remaining  Plans reimbursed                 hospitals      for program   claims on dif-
ferent bases than those used for                 the Plans'       private   subscribers claims.



                                             2
The program   could have saved at least   $850,000  annually,  GAO estimates,
had the Plans been able to extend    to the program    the more favorable
reimbursement   rates.   (See pp. 24 and 25.)

Rising      cost of izospita2            cam2

Salaries       account   for almost   two thirds  of hospital                             operating          expenses.
The pise       in salary    expense is the major reason for                               the recent          dramatic
increase       in the cost of hospital      care.

The Nation's         community     hospitals        experienced        an average       payroll     in-
crease      of 74 percent       during      the period        1965-69,    mainly     because      of in-
creased      salary     expenses     and increased          hospital     work forces.           Hospital
employees       have traditionally             been underpaid.          Due to labor        and wage
legislation         and to the effect            of unionization,        hospital      employees'        sal-
aries     have increased        significantly.            The increased        hospital       work forces
have resulted         in more hospital            employees      per patient.        (See pp. 26 to 3

Other      contributory        factors      to       rising      hospital       costs      are

   --new      high-cost      services       now available              in    community        hospitals          and

   --the   increase  in the              number       of services           customarily          provided.
       (See pp. 32 to 35.)

Extent      that hospital         costs r@$.t be reduced
Medical   officials    believe  that    reducing   unnecessary hospital   admissions
and shortening      the lengths   of hospital    stay to the minimum number of
days needed for good quality         care can reduce medical     care costs Signif-
icantly.

Attempts         currently        are being made to control          unnecessary       hospital       ad-
missions         and lengths         of stay,   but current     patterns     of health        insurance
provide       little       incentive      to discourage     unnecessary      hospitalization.

Studies    indicate   that    the prepaid       group practice        method for delivery
of medical      care may be more economical             than the more common fee-for-
service    method.    The prepaid       qroup practice         method,     which emphasizes
Preventive      care, motivates      physicians       to limit     hospital     use to the
minimum consistent       with    good care.        The fee-for-service          method lacks
similar    incentives    to limit     hospital      use.

Other methods      being used to control         hospital                     costs     are      discussed     in
chapter    5.   Serious    problems   exist    that must                      be solved          if the attempts
to control    rising    hospital    costs   are to have                       a significant            impact.
(See pp. 39 to 60.)

Reasonabhness             of administrative              costs
Payments by the Office               for the Civilian      Health   and Medical                        Program         of
the Uniformed  Services              to selected    fiscal   agents    for costs                       incurred          in


                                                 3
    processing      hospital          claims    were,       for      the     most     part,        allowable         under
    contract     provisions.

    The Office,   however,   has exercised        limited      managerial    control,    and
    opportunities    for cost reductions        had not been identified            or had
    not been acted upon by responsible            officials.        There is potential       for
    substantial   reductions    in administrative            costs.     (See pp. 61 and 62.)

    Savings    would have been achieved          if the Office     had eliminated    the claims
    review    procedure   of the Blue Cross Association--a            prime contractor--
    since   the procedure    essentially        duplicates   reviews   previously    made by
    Blue Cross Plans--the       subcontractors.

    Investigations       should     have been              made into   the wide variances    in adminis-
    trative      claim rates    paid to the                52 Plans.     The rates  ranged from $1.25
    to $8.64 per claim         during   fiscal              year 1968.      (See 61 to 69.)

    GAO believes        that    further         savings       may be possible                 if    the     Office     were
    to

       --take    advantage     of differences   in certain    geographical    areas between
           the administrative       cos'ts per claim  charged   by the Blue Cross Plans
           and those    charged   by Mutual   of Omaha Insurance      Company, and

       --award    contracts for paying                    hospital          claims      on a competitive               basis.
          (See   pp. 66 and 67.)

    Adequacy of audits

    The Department        of Health,      Education,       and Welfare's     Audit    Agency audits
    of selected      fiscal    agents     that we reviewed         were adequate      for determining
    the allowability        and allocability           of administrative       costs,     but the scope
    of the audits        and the time spent on them were too limited                    for the audits
    to function      as an effective         tool    of management       for such matters        as the
    reasonableness        of administrative          costs    and hospital     charges,      the eligibil-
    ity of beneficiaries,          and the efficiency            of fiscal   agents.       (See pp. 70
    to 72.)

RECOMNDATIONS OR SUGGESTIONS

    The Executive         Director,         Office        for the          Civilian      Health           and Medical         Pro-
    gram of the        Uniformed         Services,          should         consider

       --looking    into      the      differences   in certain     geographical     areas between
           the administrative              costs per claim   charged     by Blue Cross and those
           charged  by Mutual            of Omaha and changing      fiscal    agents where it ap-
           pears advantageous              to do so;

       --requesting        proposals           from other   commercial                  insurance           firms     to     act
           as fiscal      agents    for        the program;
      --investigating        the causes for differences       in operating       efficiency
          which     appear to exist      among fiscal  agents   and taking     necessary                    ac-
          tion    to improve    operations    of the less efficient      agents;

      --attempting            to obtain      the more     favorable       Blue   Cross reimbursement
          formulas        for paying        hospitals     in areas       where   the program    is not
          obtaining         them;

      --discontinuing        the          duplicate     claim   review     procedure    of the      Blue
          Cross Association;

      --arranging      with Department     of Health,   Education,                  and Welfare's
         Audit    Agency officials     for an expansion     of the                 audit effort       and
         scope of review       of the program;     and

      --initiating     a pilot    program     to determine   the feasibility                     and econ-
          omy of paying    program     claims   on a prepaid    group practice                    basis.
          (See pp. 74 and 75.)


MATTERS
      FORCONSIDERATION
                    BY THE COMUTTEE
   Reductions           in the lengths     of hospital     stay would have a significant
   effect    on       Federal  expenditures       for hospital       care.    Therefore     the
   Committee          may wish to consider        the need for an analysis            of the factors
   affecting          lengths  of stay,      to identify     steps that      can be taken to re-
   duce them          without  sacrificing      the quality       of medical     care.     (See pp.
   21 to 23,          40 to 44, and 75.)
                               CHAPTER1

                            INTRODUCTION

      The General Accounting Office,       in response to a re-
quest from the Chairman, Committee on Appropriations,          House
of Representatives,      has reviewed the Civilian    Health and
Medical Program of the Uniformed Services1 (CHAMPUS). This
report discusses the results       of the review of the hospital
component of CHAMPUSin the United States.           Under that com-
ponent,  medical    care  is provided   in civilian  hospitals  to
dependents of active duty members, to dependents of de-
ceased members, and to retired        members and their dependents.
The scope of our review is described on pages 76 and 77.

        The review was directed     toward examining into (1) the
reasonableness     of fees charged and profits       realized    by par-
ticipating    hospitals,    (2) the causes for rising medical
costs in hospitals       and the methods being employed to con-
trol them, (3) the reasonableness         of administrative      costs
incurred    to process CHAMPUSclaims, and (4) the adequacy of
audits made by the Department of Health, Education,              and Wel-
fare's Audit Agency-- the principal        agency conducting      audits
at fiscal    agents' offices--   of the administrative       costs in-
curred and the benefit       payments made for hospital       services
under CHAMPUS.

       Because of the lack of criteria    and data for determin-
ing the reasonableness    of hospital   charges and profits--as
requested by the Committee-- agreement was reached with the
office   of the Chairman to concentrate    our efforts   on com-
paring hospital   charges to CHAMPUSwith charges made to
other medical programs and to uninsured persons.         The re-
sults of our comparisons are discussed in chapter 3.

      The responsibility  for administering CHAMPUShas been
delegated by the Secretary of Defense and the Secretary of

1The term "uniformed  services"    includes the Army, Navy, Air
 Force, Marine Corps, and Coast Guard and the commissioned
 corps of the Public Health Service and the National       Oceanic
 and Atmospheric Administration      (formerly the Environmental
 Science Services Administration).

                                   6
Health,  Education,   and Welfare,   through channels,    to the
Executive  Director,   Office for the Civilian   Health and Med-
ical Program of the Uniformed Services (OCHAME'US), who func-
tions under the jurisdiction      of the Surgeon General, Depart-
ment of the Army. OCBAMPUS,located at Fitzsimons           General
Hospital  near Denver, Colorado, was established       for the
purpose of administering     CHAMPUSin the United States,
Puerto Rico, Canada, and Mexico.

       The Blue Cross Association, located in Chicago, Illi-
nois, has served as a prime contractor    for the payment of
hospital   inpatient claims in 33 states,   the District of
Columbia, and Puerto Rico since the inception    of the pro-
gram in 1956.  The Blue Cross Association   subcontracts   to
52 of its  80 member Blue Cross Plans for the processing         and
payment of CHAMPUSclaims.      Mutual of Omaha, the other
prime contractor,   processes hospital      claims for the remain-
ing 17 states through its central      office    in Omaha, Nebraska.
Appendix II contains a listing    of the geographic areas ad-
ministered  by the Blue Cross Association        and Mutual of
Omaha and the names and locations      of the 52 participating
Blue Cross Plans.




                                 7
                             CHAPTER 2

                   INCREASED COST AND USE OF

               HOSPITAL SERVICES UNDER CHAMPUS

       Rising costs of medical care, discussed in chapter 4,
and other contributory       factors,   such as expanded benefits
and the addition      of new classes of beneficiaries      authorized
by the Military      Medical Benefits    Amendments of 1966, and in-
creased use of CHAMPUShave caused significant           increases in
hospital    costs since inception     of the program in 1956. A
substantial     part of the increase occurred after       1966, costs
having increased from $46.2 million         in 1966 to $134.5 mil-
lion in 1969. Exhibit        A shows total hospital   payments un-
der CHAMPUSfrom its inception         through 1969.

INCREASED BENEFITS AND NEW CLASSES
OF BENEFICIARIES UNDER CHAMPUS

         The Armed Forces have traditionally        provided medical
care to dependents of service members in facilities              of the
uniformed services when it could be provided without              inter-
fering with providing       necessary care to active duty person-
nel.      Prior to CHAMPUS, dependents who resided at locations
where medical facilities        of the uniformed services were not
available      or where the facilities     were being fully utilized
had to pay the full cost for care they obtained from civil-
ian sources.       Further,   considerable   disparity    existed among
the branches of the uniformed services           in the types of medi-
cal care provided and in the categories            of dependents desig-
nated as eligible       to receive care at uniformed services
facilities.

       The Dependents Medical Care Act of 1956 (Pub. L. 84-569)
authorized    dependent spouses and children        of active duty
members of the uniformed services         to receive medical care
benefits   from civilian     hospitals   and physicians.      The act
directed   the Secretary of Defense to contract          with civilian
sources for certain      authorized    medical care for eligible
dependents,     The act included definitions        of the categories
of dependents who were eligible         and the types of medical



                                   8
care to be provided in facilities     of the uniformed         services.
The program became effective     on December 7, 1956.

     The Military  Medical Benefits     Amendments of 1966 ex-
panded the coverage to include retired      members and their,
dependents and the dependents of deceased members. The
amendments also authorized   additional    services from civil-
ian sources for eligible   CHAMPUSbeneficiaries.

        Although statistics   for a precise measurement of the
effect     of the 1966 amendments were not readily      available,
our analyses indicated thatabout         46 percent of the total      in-
crease in program costs from fiscal         year 1966--which    in-
cluded costs for dependents of active duty personnel only--
to fiscal     year 1969 was attributable     to the addition    of new
classes of beneficiaries      and the expansion of benefits        au-
thorized     by the 1966 amendments,      The remaining increased
costs stemmed from increased use of the program by bene-
ficiaries     and from higher medical costs.




                                    9
INCREASED USE OF CHAMPUSBY BENEFICIARIES

       In recent years an increasing       number of beneficiaries
have used the benefits      available   under CHAMPUS. Although
exact figures were not available,         we estimated,   on the ba-
sis of a special OCHAMPUSstudy, that approximately             400,000
of the 6 million   eligible    beneficiaries     used CHAMPUSin fis-
cal year 1969--an increase of about 30,000 over the number
of beneficiaries   who received benefits       in fiscal   year 1968
and nearly double the number who received benefits            prior to
expansion of the program.        Care for dependents of active
duty members represented      about three fourths of the hospi-
tal costs under CJIAMPUSduring 1969, but OCHAMPUSexpects a
greater percentage of expenditures         for other eligible     de-
pendents in future years.
      The   followingtable shows that the increase in paid
hospital claims from fiscal   year 1966 to fiscal  year 1969
was about 40 percent.

                                          Number of paid
             Fiscal     year              hospital claims

                   1966                        254,353
                   1967                        282,334
                   1968                        325,792
                   1969                        355,348

       Since 1967 there has been a definite          upward trend in
admissions of CHAMPUSbeneficiaries           to civilian   hospitals
as a percent of the total        admissions of the beneficiaries
in both civilian     and military    hospitals.      Also, as admis-
sions of dependents of active duty personnel to civilian
hospitals    have increased,     admissions to uniformed      services
hospitals   have declined by almost the same amount.            The
following    data from the 13th annual CHAMPUSreport shows
the relationship     between admissions to civilian        and uni-
formed services hospitals.




                                   10
                                       Estimated     Admissions     of
                         all      Eligible     CHAPPUS    Beneficiaries    to
                               Civilian     and Service Hospitals       in
                               the United States and Puerto Rico
                                  During Calendar Years 1967-69

                                          Number of admissions
                                          Civilian    Service                Admissions  in civilian
                                          hospitals  hospitals               hospitals  as a percent
 Category      of beneficiary             (note a>   (note b)                   of all admissions

                                                    (thousands)

Dependents     of active      duty
   personnel:
      1967                                   244.9                372.2                 39.7
      1968                                   262.4                353.7                 42.6
      1969                                   271.5                341.3                 44.3
Retired    personnel:
      1967                                     11.3                52.5                 17.7
      1968                                     16.7                56.3                 22.9
      1969                                     20.2                58.6                 25.6
Dependents     of retired      or
   deceased personnel:
      1967                                     38.3                82.9                 31.6
      1968                                     55.2               .86.1                 39.1
      1969                                     66.9                89.2                 42.9
All eligible      beneficiaries:
      1967                                    294.5               507.6                 36.7
      1968                                    334.3               496.1                 40.3
      1969                                    358.6               489.1                 42.3

%I e      to lag   in submission       of claims,        1969 admissions       are slightly         under-
    stated.
b
    Includes   Army,   Navy,     Air   Force , and Public           Health   Service   hospitals.



In contrast    to the more than 44 percent shown in the table
for 1969, OCHAMPUSreported that in 1960 about 32 percent
of all admissions of dependents of active duty personnel
were to civilian     hospitals.

      Additional data on the estimated number of admissions
and the average daily patient  load in civilian hospitals
are shown below.




                                                         11
    Estimated Admissions and Average Daily Patient Load
           of Dependents of Active Duty Personnel in
    Civilian   Hospitals    in United States and Puerto Rico
                       Fiscal Years 1960-69

                        Civilian
     Fiscal      hospital     admissions       Average daily
      year              (note a>               patient load

      1960              193,800                    3,000
      1961              209,400                    3,200
      1962              247,200                    3,800
      1963              238,500                    3,700
      1964              234,300                    3,600
      1965              212,600                    3,300
      1966              210,800                    3,200
      1967              236,100                    3,600
      1968              247,500                    4,100
      1969              271,700                    4,700

aDue to lag in submission     of claims,   1969 admissions     are
 slightly  understated.

       Although the number of dependents of active duty per-
sonnel increased by only 9 percent from fiscal     year 1960
through fiscal     year 1969, annual admissions to civilian
hospitals    of these beneficiaries  increased by about 40 per-
cent, or nearly 78,000.

      About 61,000 of the 78,000 increase in hospital     ad-
missions occurredduring    fiscal years 1967-69.     OCHAMPUSre-
ported that the major reason for this increase appeared to
be the increase in family separations      caused by the mili-
tary buildup in Southeast Asia.     OCHAMPUSreported also
that,  on the basis of civilian   hospital   admissions, depen-
dents residing   apart from their  sponsors1 increased from
52.4 percent in fiscal    year 1965 to 72.3 percent in fiscal


1A sponsor is an active duty member or a retired    member of
 the uniformed   services from whom a dependent derives eli-
 gibility   for medical care under CHAMPUS.


                                  12
year 1969, or 20 percent.     Dependents of active duty mem-
bers who reside apart from their     sponsors may select care
in either civilian  or uniformed   services hospitals,    whereas
those who reside with their    sponsors must use military    hos-
pitals.

       OCHAMPUSbelieves that two other factors           may have
caused the increased utilization         of civilian    hospitals     by
CHAMPUSbeneficiaries:          (1) the inc reased work load in mil-
itary hospitals,     caused by the Vietnam conflict,         which has
reduced the number of beds available          for dependents and re-
tired personnel and (2) the closing of military             installa-
tions,   including   hospitals    convenient    to residences     of many
retirees    and their dependents.

        Review of Defense-wide     data showed that the use of
military     hospital   beds by CHAMPUSbeneficiaries            had de-
creased.      We could not determine whether this was because
the beds were needed by military           personnel or because of
family separations.         It seems that the need for beds by
military     personnel was not the primary reason for de-
creased use of the beds by CHAMPUSbeneficiaries,                   because
the total     available    beds in military      hospitals     that were
occupied in 1967-69 averaged less than 80 percent.                   Details
follow.
Utilization      of beds at fixed                  Calendar year
military     medical facilities            '1967           1968        1969
Total operating       beds                 43,005        45,070       43,868
Total occupied beds                        32,255        35,774       33,992
       Percent occupied                      75.0          79.4         77.5
Total beds occupied by ac-
  tive duty personnel                      21,383       25,561       24,005
      Percent of total occupied             66.3         71.5         70.6
Total beds occupied by re-
  tired personnel                           2,018        2,078        2,122
      Percent of total occupied              6.2          5.8          6.2
Total beds occupied       by depen-
  dents                                     7,467        7,164        6,919
     Percent of total      occupied         23.2         20.0         20.4
Total beds occupied by other
  personnel                                 1,387           971          946
     Percent of total occupied               4.3           2.7          2.8

                                      13
                                CHAPTER3

               COMPARISONOF HOSPITAL CHARGESFOR

             CHAMPUSBENEFICIARIES WITH CHARGESFOR

              OTHER PROGRAMSAND UNINSURED PATIENTS

       A comparison of hospital        claims     paid under this pro-
gram with amounts paid under several medical insurance pro-
grams and a review of hospital           billing    procedures showed
that CHAMPUSbeneficiaries          were generally        charged the same
fees for services      as were all other hospital           patients.    A
comparative   analysis    of randomly selected claims covering
the same or very similar        services      at 20 hospitals      showed no
evidence that CHAMPUSbeneficiaries               were being inexplicably
charged more than, or being hospitalized               longer than, pa-
tients   of medical-hospitalization           insurance programs.
CHAMPUSand privately        insured patients         generally   paid more
for hospital    services,    however, than did uninsured patients,
mainly because uninsured patients             were usually hospitalized
for shorter   times.

       It was beyond the scope of this review to make a de-
tailed    review of hospital     cost accounting    and charge sys-
tems, but we did find that there was no direct            correlation
between operating       costs and charges for individual       hospital
services.       In general,   the hospitals'   charge systems were
designed to recover total        operating   costs, rather than costs
for specific      or separable services.      Thus charges for some
hospital     services   exceeded the costs incurred     to provide
the services      and charges for other hospital      services did not
recover related       costs.

       Specifically,    our review indicated       that hospitals    gen-
erally     undercharged for maternity     care, which accounted for
about one third of the CHAMFTJS       hospital    claims,   and recov-
ered the costs not allocated       to maternity       care by charging
more than related      costs for services provided by other de-
partments and for ancillary       services.     Although we could
not determine the number of hospitals          following    this prac-
tice,    it appears to be common and probably reduces total
hospital     payments under CHAMPUS.


                                     14
        Our review of maternity   claims showed that the average
total    charge and average length of stay differed        among hos-
pitals.     We believe that efforts     to reduce lengths of stay
should be given serious consideration         because shorter
lengths of stay would offer significant          potential  to reduce
the overall     costs of the hospital     component of CHAMPUS. We
are not, however, in a position       to say whether shorter
lengths of stay are feasible      or attainable.

      We found that the total payments to hospitals            under
CHAMPUSwere significantly       affected     by the reimbursement
agreements between the participating          hospitals    and the Blue
Cross Plans responsible     for administering         CHAMPUS. Because
39 of the 52 Blue Cross Plans paid CHAMPUSclaims on the
same basis they used to pay claims         for their own subscribers,
the total   amount of the hospital      claims paid by CHAMPUS
during fiscal   year 1968 was $2.3 million          less than billed
charges,    For the remaining 13 Plans, we estimate that the
program could have saved at least $850,000 annually if the
Plans had been able to extend to CHAMPUSthe more favorable
reimbursement   rates for paying hospital         claims,

COMPARISONOF HOSPITAL CHARGES

        At four Blue Cross Plans located across the United
States, we compared hospital        charges to CHAMPUSbenefi-
ciaries     with hospital   charges to beneficiaries      of the Fed-
eral Employees Health Benefits         Program (hereinafter     re-
ferred to as the Federal employees program)--high            option--
and Blue Cross private       insurance programs.      The average
charges for similar       hospital  claims were compared, by hos-
pitalization     program, for 20 selected hospitals.

Comparison of hospital   charges and
lengths of stay at individual    hospitals

      Our review of randomly selected maternity           claims--un-
der the diagnostic    code for care without        complications--
showed that the average total        charge and average length of
stay for CHAMPUSbeneficiaries          were generally    in line with
those for similar    claims for patients       insured under the
Federal employees program and Blue Cross private              insurance
programs.    On an individual-hospital        basis, comparison of
an equal number of paid maternity         claims showed no evidence
that CHAMPUSbeneficiaries       were, as a practice,        charged
more than, or hospitalized       longer than, patients        under

                                  15
insurance programs.    Also we found that hospital  charges
for room and board and ancillary    services were consistently
applied to all patients.

      The average total   charge for CHAMPUSmaternity    claims
was lower than the average charges for insurance programs
at nine of the 20 hospitals,     higher than the average charges
at six hospitals,   and between the program averages at the
remaining five hospitals.      Exhibits B through E show details
of our comparisons of the claims for the 20 hospitals,       cat-
egorized under the four Blue Cross Plans we visited.

      Within each hospital,     differences     in the average total
charge for maternity    claims among the insurance programs
were generally    due to differences      in the average length of
stay.    The average lengths of stay ranged from 2.3 days to
5.5 days at the 20 hospitals.         At hospitals    where the aver-
age total   charge for CHAMPUSmaternity         claims was higher
than those for similar     claims under the other programs, the
average length of stay for CJMMPUSpatients            was longer.

        We randomly selected hospital     claims paid under CHAMPUS
for six additional     diagnostic   codes for comparison with
similar    claims paid by the insurance programs.          Although
these additional    diagnostic    codes accounted for a high vol-
ume of CHAMPUSclaims processed by each of the four Blue
Cross Plans, the number of claims paid to a single hospital
was not large enough for a meaningful         statistical     analysis.
Our review of the individual       claims under these six diag-
nostic codes showed that the daily room and board charges
under the insurance programs were comparable.             The differ-
ence in the total charge for each claim was due primarily
to wide variations     in the lengths of stay, which appeared
to stem from the medical considerations          of the individual
cases.

Comparison of hospital    charges     for
insured and uninsured    patients

      Our review showed that uninsured patients    were charged
the same fees as those customarily    charged patients   under
CHAMPUSand insurance programs but that the total       charges
per claim for uninsured patients   were less than those for


                                 16
insured patients  receiving similar medical care,                                                           primarily
because of a shorter average length of stay.

      Hospital.officials         said that the general operating
policy was to treat all patients           the same whether or not I
they were insured.         At one hospital     we were told that, to
prevent financial        hardships,    admissions personnel attempt
to place uninsured patients          in ward accommodations rather
than in more expensive rooms.

      Our review and comparison of hospital     claims paid dur-
ing the period January to June 1969 for maternity        care with-
out complications     at six hospitals showed that the average
total  charge and average length of stay were less for unin-
sured patients    than for insured patients.    The following
table summarizes the data obtained at three hospitals         under
the Blue Cross Plan in Denver.

                                      Average     per   claim   for    maternity       care

                                  Hospital      1                    Hospital         2                  Hospital      3
                          U+nsured            Insured        Uninsured               Insured     Uninsured            Insured
                          patients            pa.tients      patients               patients     patients            patients
                         (10 cases>          (33 cases)     (16 cases)             (48 cases)   (10 cases>          (30 cases)
Total   charge               $300               $330            $253                 $324           $284              $307
length    of   stay
   (days)                     3.1                3.4             3.6                  4.4            3.2               3.8



        Our review and comparison of similar         claims for unin-
sured and insured patients         at three hospitals     under the
Blue Cross Plan in Richmond, Virginia,            showed similar      find-
ings.     Hospital   officials    stated that the differences         be-
tween uninsured and insured patients           in lengths of stay
and other hospital        services were not due to hospital          poli-
cies or billing      practices.      They said that the physicians
determine both lengths of stay and hospital             services.       They
attributed     the lower average length of stay primarily             to
demands from the uninsured patients           and to physicians'        de-
cisions    to minimize,      where possible,   the total    hospital
charges to uninsured persons.

Hospital              charges        for      maternity               care

      Our review indicated that, although hospital                                                            charge
systems were designed to recover total   costs,the                                                           charge for

                                                                17
a specific      hospital   service was not always set to recover
the cost of providing         that particular        service.      Hospital
officials     and other medical experts stated that hospitals
generally     charged less than cost for maternity               care and
other selected services and charged more than cost for an-
cillar      services,    such as pharmacy services,            central   ser-
vices,    Y and laboratory      services.      For example, analysis          of
the financial       statements prepared by certified             public ac-
countants     for two hospitals        for the 6-month period ended
June 1969 showed the following             relationship       of costs to
revenues, based on equating the cost for each service to
100 percent.

                                    Hospital  A         Hospital B
      Hospital       service      cost    Revenue      Cost Revenue

                                                (percent)

        Maternity      care         100         63          100        63
        Pharmacy                    100        245          100       302
        Central                     100        247          100       215
        Laboratory                  100        166          100       150

       A Blue Cross Association     official   stated               that all Blue
Cross insurance programs were operated on an                      actuarial    ba-
sis which ensured that premium rates covered                      the programs'
total hospital   payments.      But it is recognized                  that pay-
ments to hospitals   for maternity       cases under              each insurance
program are less than related       hospital   costs              and that hos-
pitals   recover the shortfalls     in the charges                for other ser-.
vices.

       We found that hospitals        had traditionally        charged less
than cost for maternity       care.      This is because maternity
care, although normally involving            relatively      short lengths
of stay, requires     the use of high-cost          services,     such as
labor and delivery      rooms, anesthesia,         and the nursery.       Ad-
ditionally,     the hospital   facilities       and staff employed for
maternity    care are somewhat more fixed and less flexible
than those for many other categories             of hospital      care and



1Includes    such items        as supplies     and general        services.


                                          18
their     use by maternity    patients        is subject    to uncontrol-
lable     fluctuations.
        Under these circumstances       any medical care program
that has a preponderance of hospital           claims for services
which are billed     below cost, e.g., CIiAMPUS, is being sub-
sidized by other programs having a lesser proportion             of
similar    claims.   The high percentage of maternity         cases--
about one third of total       hospital    claims--under   CHAMPUS
serves to reduce the total hospital           payment to an amount
less than that which would be paid if hospital            charges for
maternity     care were based on costs.        By comparison,   data
obtained from the Blue Cross Association            showed that the
Federal employees program received less advantage from ma-
ternity    cases because, during the period 1966-69, only
11 percent of hospital      admissions under that program were
for such care.      The extent to which unrecovered maternity
costs are recovered by charging more than cost for other
hospital    services furnished    to CUAMPUSbeneficiaries        was not
determinable.
Comparison of hospital      charges and
lengths of stay in different        geographic regions
      Our review at four Blue Cross Plans of 840 randomly
selected maternity   claims for care without     complications
showed that the average total     hospital  charge and the aver-
age length of hospital    stay for CHAMPUSbeneficiaries        were
comparable to those for patients     covered by other programs.
                                 Number           Average        Average
                                of claims          total       length of
              Program           reviewed          charge      stay (days)
        CHAMPUS                     240            $349            4.0
        Federal employees--
          high option                240             361           3.9
        Blue Cross                   360             352           4.0
            Total                   gg
       Further analysis    of this data showed that the average
charge and length of stay varied among the Blue Cross
Plans.      As shown below, for CHAMPUSmaternity    claims the
average charge was lowest in Denver and highest in Oakland,
California,     while the average length of stay was lowest in
Oakland and highest in Cincinnati,      Ohio.

                                         19
                                     Federal    employees
                     CHAMPUS                program                  Blue Cross
             Average     Average   Average         Average    Average        Average
             charge      length    charge          length     charge         length
                                     per                        Per
                                    claim       stay':days)    claim      stay'gdays)

Richmond      $367         3.9      $360              3.8      $369            4.0
Cincinnati     346         4.4       343              4.4       338            4.2
Denver         315         3.9       358              4.1       337            3.9
Oakland        369         3.6       384              3.2       363            3.3




                                        20
LENGTHS OF HOSPITAL STAY FOR MATERNITY CASES

        Our review showed that,       although the lengths of stay
for CHAMPUSmaternity          cases were generally      comparable to
those of cases under other programs, efforts               to reduce the
lengths of stay for CHAMPUSmaternity             cases should be con-
sidered,      because of the potential       to reduce program costs
significantly       by eliminating    services which may not be med-
ically    necessary.      Another indication     that such efforts     are
warranted      is that the average length of stay in civilian
hospitals      for the 104,000 CHAMPUSmaternity          claims for care
without     complications     during 1969 was 4.2 days.        This was
longer than the average length of stay for similar               maternity
cases in Navy and Air Force hospitals.              Data for maternity
care without      complications     in Army hospitals     were not avail-
able.

      During 1969 about 25,000, or 23 percent,          of all CHAMPUS
maternity   claims were paid to hospitals       located in the Moun-
tain and Pacific     Census Regions of the United States.          The
average length of stay for these claims was 3.8 days.              The
average lengths of stay in the seven more easterly             census
regions for maternity     claims ranged from 4.3 to 5.1 days and
averaged 4.6 days.      If the 3.8-day average length of stay
experienced    in the Mountain and Pacific      Census Regions ap-
plied to all CHAMPUSmaternity       cases in 1969, significant
savings could have been realized.        Pertinent     dataforthe
nine census regions across the United States are shown on
page 22.

      An analysis      by the Commission on Professional    and Hos-
pital   Activities1     of almost 900,000 maternity   claims for
care received       in 1967 and 1968 at 972 hospitals    showed that
the average length of stay for maternity        claims for care
without   complications      was 4.1 days. For half of these claims
the average length of stay was 4 days or less.

     The average length of stay for maternity   claims for
care without  complications in Navy and Air Force hospitals


1
    Sponsored by such organizations  as the American Hospital
    Association and the American College of Physicians.


                                    21
                     AVERAGE   LENGTH   OF STAY - CHAMPUS MATERNITY   CLAIMS
                                              1969

CENSUS REGION

PACIFIC



MOUNTAIN



WEST SOUTH CENTRAL


SOUTH ATLANTIC



EAST SOUTH CENTRAL



NEW ENGLAND



MIDDLE ATLANTIC



EAST NORTH CENTRAL



WESTNORTHCENTRAL
also generally     was lower than that for CHAMPUSbeneficiaries
in civilian     hospitals.    The average lengths of stay for ma-
ternity    cases in Navy and Air Force hospitals         were 3.7 and
4.1 days,    respectively.     The average    lengths   of   stay in
these military     hospitals   also varied,     by hospital,     from a
high of 5.3 days to a low of 3 days.            At 44 percent of the
hospitals,    the average length of stay was less than 4 days.
Furthermore,     our analyses showed that the average length of
stay at 107 Navy and Air Force hospitals           was shorter than
that for CHAMPUSbeneficiaries         in civilian     hospitals     in
seven of the nine census regions.           During 1969 the average
length of stay for all maternity        cases in Army hospitals        was
4 days.     This average is less than the 4.4 daysfor all
CHAMPUSmaternity        cases in 1969.

       We believe that the variations  suggest that the longer
average length of stay for maternity    cases in civilian   hos-
pitals   may be due to nonmedical reasons.    Pertinently,  data
for the Federal employees program showed that patients      with
broader insurance coverage were hospitalized      longer, on the
average, than were other patients.     (See p. 43.)

       Action has reportedly       been initiated      by two neighboring
hospitals    in Chicago, Illinois,       to centralize      obstetrics   and
gynecology care in a new specialized            hospital    facility   and
to increase hospital      efficiency     and economy for maternity
care through a minimal-length-of-stay             program.     Under the
program patients     will be discharged from 1 to 1.5 days after
giving birth.     The reduced length of hospital            stay should
result    in lower cost to both the patients           and the hospital
through more efficient       utilization     of facilities.




                                     23
REIMBURSEMENTMETHODSUSED FOR
PAYMENTOF CHAMPUSHOSPITAL CLAIMS

       The 52 Blue Cross Plans administering          CHAMPUSreimburse
hospitals    for their regular business subscribers            on the ba-
sis of either     a negotiated    rate or 100 percent of billed
charges.     Of the 52 plans, 39 reimbursed hospitals            for
CHAMPUSclaims under the same reimbursement              formulas used for
their   regular Blue Cross subscribers.           This resulted      in
CHAMPUS's paying $2.3 million         less than the charges billed
by the hospitals      during fiscal     year 1968, The remaining 13
Plans were unable to extend to CHAMPUSthe more favorable
formulas which hospitals       voluntarily      had contracted     with the
Plans for paying claims against their regular              subscribers.
We estimate that at least $850,000 could be saved annually
if the Plans were able to extend to CHAMPUSthe more favor-
able formulas for paying hospital           claims.

       We found that the 39 Plans which extend their reimburse-
ment formulas to CHAMPUShad various types of agreements with
hospitals.     Of these 39 Plans, 33 reimbursed hospitals      on
the basis of negotiated      formulas providing    for payment on
the basis of 85 to 99 percent of total charges billed         by the
hospitals    and six reimbursed hospitals     on the basis of 100
percent of billed     charges.

       The remaining 13 Plans also had agreements with hospi-
tals for paying claims against their priviate            subscribers.
These agreements provided for reimbursing          hospitals     for 84
to 99 percent of billed      charges.   Of the 13 Plans3 nine did
not extend the lower rates to CHAMPUS, which reimbursed hos-
pitals    at 100 percent of billed    charges,and     four did obtain
for CHAMPUSa rate less than billed          charges, which resulted
in payments of $383,000 less than billed          charges.     The rates
obtained,    however, required    CHAMPUSto pay for services
about $248,000 more than Blue Cross Plans would have paid
for their regular     business subscribers.

       We found no evidence that OCHAMPUSand the Blue Cross
Association    had attempted after 1963 to obtain for CHAMPUS
the more favorable     Blue Cross reimbursement   formulas for
paying hospital    charges in 13 Blue Cross Plan areas.
OCUAMPUSofficials      said that they had no legal basis for ob-
taining   these reimbursement    arrangements with hospitals,  but,

                                    24
pertinently,    the contract  with the Blue Cross Association
provided that the association      and the Blue Cross Plans make
available    to the Government the benefit    of the Blue Cross
formulas,    where possible,   Blue Cross Association     officials
said that they had attempted to obtain these arrangements
for CHAMPUSin 1963 but had failed,        because of the unwill-
ingness of the hospitals     which are not obligated    to extend
to CHAMPUStheir reimbursement       agreements with Blue Cross.

      Blue Cross Association   officials  stated that hospitals
accepted payment of less than billed     charges from Blue Cross
because it paid its claims promptly and was not a collection
risk,   i.e., it cost less to process claims of Blue Cross
subscribers   than it did those of non-Blue Cross subscribers
because bad debts were not incurred,      We believe that this
reasoning applies equally to CHAMPUS.

      We believe also that OCHAMPUS, together with the Blue
Cross Association,     should attempt to obtain for CHAMPUSthe
more favorable    terms for paying charges that the hospitals
contracted   with the 13 Blue Cross Plans.




                                25
                                CHAPTER    4


                    RISING COST OF IXEDICAL CARE

                        IN CIVILIAN       HOSPITALS

       The rapid rise in medical costs in the last             few years,
particularly    for hospitalization,      has increased      the cost of
CHAMPUSsignificantly.         The overall    cost of the     hospital
component of CHAMPUSincreased from about $46.7               million   in
1966 to about $135.8 million         in 1969. Hospital       costs rep-
resented from 55 to 67 percent of the total           cost     of CHAMPUS
during each of the 4 years.

        Although CHAMPUSwas expanded in 1966 and the benefits
paid by the program have increased annually,              it is essen-
 tially    still    a supplementary    program designed to complement
 the capability       of the medical facilities     of the uniformed
 services.       About 42 percent of the total      inpatient    hospital
care for military         dependents and retired    personnel in 1969
was provided under CHAMPUS; the remainder was provided in
military      hospitals.     Also in 1969 CHAMPUSbeneficiaries
constituted       less than 1 percent of the 28 million        admissions
to short-term        community hospitals     and the related    $16 bil-
lion in hospital         expenditures.

        Nevertheless     Government expenditures        for medical care
provided by civilian         hospitals    to CHAMEWSbeneficiaries       is
substantial       and is rapidly     increasing.     Since the increase
in costs for hospitalization            of CHAMFUSbeneficiaries      is
directly     influenced     by the general increase in costs of
hospitalization,        we geared this segment of our review to
identifying       (1) the major reasons for rising         hospital  costs
for all patients,        (2) the prospects       for future hospital
costs, and (3) the efforts           being made to contain hospital
costs, which are discussed in chapter 5.

       Hospital salary increases are the major reason for the
rapid rise in hospital    costs in the last several years.
These increases were due, in great measure, to the fact
that hospital   employees have traditionally    been underpaid
and to the fact that their salaries      have recently  been
catching up with salaries     paid in other industries.


                                     26
Another reason for the rising      costs has been the increase
in the number of complex services       provided by hospitals,
such as intensive  care facilities      and coronary treatment
centers.




                                 27
EFFECT OF SALARIES ON HOSPITAL COSTS

                 studies of hospital
           Published                    costs and statements made
to us by physicians     and hospital  administrators  during dis-
cussions emphasized that the cost of employees services was
primarily  responsible    for the recent dramatic increase    in
hospital  costs.    At the 12 hospitals   we visited,  salary ex-
pense for 1969 ranged from 57 to 72 percent of each hospi-
tal's       operating      expenses      and available     data   showed that      this
cost       element      had increased      substantially     in recent    years.

      On a national    average, salary expense constitutes       almost
two thirds  of a hospital's      total operating expense.    All
community hospitals     in the Nation experienced payroll      in-
creases averaging 74 percent from 1965 through 1969.           Data
on salary expense obtained at the 12 hospitals       we visited
shows the significance      of the salary increases,   as follows:

                                                                         Total
                                                                      increase
Hospi-                          Payroll   costs                                  Per-
    -g&-        1965       ----
                           1966      1967       1968       1969     Amount       cent
                                      (000 omitted)

     1       $3,800 $4,100 $ 5,000 $ 6,300 $ 7,400                  $3,600        95
     2        1,400  1,600   2,000   2,400   2,700                   1,300        93
     3        3,500  3,800   4,200   4,600   5,200                   1,700        49
     4        4,200  4,400   5,200   6,500   8,300                   4,100        98
     5           400    800  1,200   1,500   1,900                   1,500       375a
     6        8,200 9,400   10,900  13,400  15,700                   7,500        92
     7        5,100  5,500   6,200   7,700   9,200                   4,100        80
     8        5,100  6,000   7,100   8,000   9,300                   4,200        82
     9           500    600     700     900  1,200                      700      140
    10          (b)  4,200   4,700   4,900   5,600
    11        3,000  3,300   4,300   4,700   5,300                   2,300         76
    12         (b)   1,300   2,800   3,800   4,600

aDue largely           to change in method of reporting             departmental
    expenses.
b
    Information        not obtainable.



                                             28
      About one half of the total payroll   increase for com-
munity hospitals   in recent years was caused by salary in-
creases.   The remainder of the increase was due primarily      to
an increased hospital   work force, which has resulted    in an
increase in the ratio of hospital   employees to patients.

       Our review showed that the major reasons for the signi-
ficant   salary increases in recent years were the enactment
of labor and wage legislation    and the effect of unionization,

Labor and wage legislation

      Historically,      nonprofessional, semiskilled hospital      em-
ployees have been low paid; these low-paying hospital          jobs
were not included under the Federal minimum wage law until
February 1, 1967, and then at only $1 an hour.        The law pro-
vided that the minimum rate increase by 15 cents an hour an-
nually until      a minimum rate of $1.60 an hour is reached in
1971.

      The labor and wage legislation       had the greatest   impact
on hospitals   located in the southern part of the Nation.
Some surveys have indicated      that the major part of increased
salary costs resulted     from increasing    the wages of higher
paid hospital    employees in order to maintain a graduated
wage structure    within  the hospital    and not from elevating
the low-paid employee salaries       to the new legal minimum.

Employee unionization

      Unionization    of hospital employees is occurring       in the
highly industrialized     areas of the country.        The number of
non-Federal hospitals     having collective-bargaining       contracts
was less than 10 percent of all hospitals          in the Nation in
1967.

      Officials   at several of the hospitals         we visited    com-
mented on the significant       impact the threat of unionization
had had on the hospital      employees' salaries.        They stated
that, to avoid unionization       and to hold competent staff,
wages were maintained      at levels comparable to union wage
scales.     For example, hospitals       compete regionally      for their
nursing staff,    and hospital    officials     stated that union wage
scales, especially     for nurses were influencing         salaries    of
other hospital    employees.
                                    29
       Officials       at a local hospital    association   said that the
trend was toward unionization           and that unionization     of hos-
pitals    would increase costs further         because of jurisdic-
tional    limitations.        They stated that a registered     nurse was
permitted      to perform only specified       tasks and that adherence
to such limitations         increased both the number of employees
required by a hospital          and the related    costs.

       Administrators   at hospitals     we visited     believed,     in
general,    that the status of hospital       employees as an under-
paid group had been largely       corrected     and that, for the most
party these employees were currently          receiving      salaries    com-
parable to similar     groups in industry.        Thus, although they
anticipate     further salary increases,      they expect the rate of
increase to decline and follow more closely the pattern                  of
industrial     wages and the cost-of-living       index.

Increased      hospital     work force

        In   1950 the number of hospital     employees per patient
averaged      1.78.   By 1968 the number had increased to an aver-
age 2.65      employees per patient.      Where the information   was
available,      we obtained the number of hospital      employees per
patient      at the hospitals  we visited    for 1965-69, as follows:

                Number of hospital            employees
                        P   patient           day            Percent increase
Hospital      -1965   -19::   1967
                              --              1968   -1969    or decrease(--)

     1'        2.46       2.68   2.88     2.98       2.73           10.98
     2         3.08       3.19   3.31     3.01       3.26            5.84
     3         3.02       2.93   2.94     2.85       2.87          -4.97
     4         2.62       2.77   3.18     3.55       3.25           24.05
     5         2.38       2.40   2.64     2.54       2.72           14.29
     6         2.39       2.46   2.46     2.46       2.79           16.74
     7         2.43       2.51   3.05     3.85       2.84           16.87
     8         2.80       2.76   2.60     2.86       3.08          10.00

      During the period 1965-69, there was a total      increase
of 438,000 employees, or 32 percent,     at all community hospi-
tals.    During that period hospital   admissions increased by
1.8 million,    or about 7 percent.   Thus the increasing    pa-
tient  load only partially   explains the increase in the num-
ber of employees.

                                         30
      The increases    in the number of hospital         employees can-
not, for the most part,      be offset    by increases      in employee
productivity,    since many of the additional         employees are
engaged in providing     new hospital     services    resulting   from
advances in medical technology.          The salaries     related   to the
increase2 employees-per-patient        ratio    show up in higher
charges to patients.




                                                                                      i;.,
                                                                             .- ,;     i
                                                                              ,.             ’
                                                                                   i : ,i

                                    31
INCREASE IN HOSPITAL SERVICES

       Since 1966 nonsalary hospital          expenses in short-term
general hospitals       in the United States have increased from
$4 billion     to $6.8 billion,     or about 70 percent.        This has
resulted    primarily     from the new high-cost       services being
made available       in community hospitals      and from the increase
in the number of services         customarily    provided to patients.

New high-cost   hospital      services
available   in community      hospitals

         Historically,       according to one source, advanced thera-
peutic      services were provided almost exclusively                by univer-
sity medical schools or by medical centers in large metro-
politan      areas.      During the 1960's the role of the community
hospitals       changed and inpatient        services grew in complexity.
The American Hospital           'Association    stated that additional
services       in large hospitals       generally    included intensive
care facilities,          coronary treatment       centers,     renal dialysis
facilities,         and organ banks, which manifest           the progress and
developments of medical science.                In small hospitals,        new
services       are generally      those of registered       pharmacists     or
pathologists,          expanded surgical     and emergency lifesaving
devices,       and more extensive       outpatient     services.

       The following     table,  based on information      supplied by
hospitals     in reply to an American Hospital        Association   in-
quiry 9 indicates     the growth in the number of community hos-
pitals    providing   certain   additional  services.

                                      Percent of hospitals
                                        providing service           Percent
             Service                      1963     1968            increase

Intensive    care unit                     18           42             133
Pharmacy                                   53           72              36
Postoperative    recovery     room         63           73              16
Outpatient    department                   40           46              15

       Our review at 12 hospitals     showed that some had ob-
tained high-cost     equipment to expand their capability   to
furnish   the following    related services.



                                      32
       --Sophisticated        radiation   therapy
       --Hemodialysis       treatment
       --Cerebral     arteriogram
       --Isotope     machine treatment
       --Inhalation      therapy
       --Cardiovascular         treatment

These services involve the acquisition    of expensive equip-
ment and frequently    of highly trained personnel to operate
it; thus the improved medical care has increased hospital
expenditures  substantively.

        The American Hospital     Association    reported that during
the 1960's hospitals      increasingly     were offering      comprehen-
sive health care services.          For example,    the  following    sta-
tistics    for 1969 show that a large number of community hos-
pitals    had psychiatric    inpatient   units.

                                                    Percent of hospitals
  Number of                  Number of               having psychiatric
hospital beds                hospitals                inpatient  units

   6   to    24                    330                        1.2
  25   to    49                 1,205                         2.6
  50   to    99                 1,386                         3.8
 100   to   199                 1,227                        11.2
 200   to   299                    564                       24.3
 300   to   399                    333                       47.4
 400   to   499                    194                       60.3
 500   or   more                   207                       77.8

        Also many outpatient      services now being furnished     by
hospitals     traditionally    have been furnished     at the physi-
cians' offices.         About one of every three outpatient     visits
to hospitals      is to emergency rooms; the remainder are to
clinics     or are referrals    for laboratory,    radiology,  or sim-
ilar services.

      The Social Security   Administration      reported     in January
1970 that the distribution     of health expenditures,         by type,
had changed considerably.      In the past the percentage of
expenditures   paid to physicians    in private     practice    was
greater than the percentage paid to hospitals.             According
to statistics   of the Social Security     Administration--shown

                                         33
below--there   has been a complete reversal       of the former
ratios,   which may be another indicator      that hospitals    are
now providing    an increased amount of services.        Some of the
change in ratios    may be due, however, to the fact that hos-
pital   costs have been rising   more rapidly     than have physi-
cians costs.     (See our report entitled     "The Civilian   Health
and Medical Program of the Uniformed Services,"          B-133142
May 19, 1970.)

        Total                                             For physicians'
        health      For hospital     care                      services
        expen-                 Percent                                  Percent
       ditures       Expen-         of                 Expen-               of
Year   (note a)      ditures     total                 ditures           total

        (000,000   omitted)                  (000,000       omitted)

192gb $ 3,644       $    664      18.2             $ 1,005                  27.6
1935;   2,935            763      26.0                  774                 26.4
1940"   3,956         1,013       25.6                  973                 24.6
1950   12,867         3,845       29,9               2,755                  21.4
1955   18,036         5,929       32,9               3,680                  20.4
1960   26,973         9,044       33.5               5,684                  21.1
1965   40,591        13,520       33.3               8,745                  21.5
1966   45,114        15,485       34.3               9,156                  20.3
1967   50,935        18,029       35.4              10,287                  20.2
1968   57,103        20,751       36.3              11,562                  20.2

aIncludes  such items as dental care, nursing-home                     care,
 drugs, eyeglasses,     construction, administration,                  hospital
 care, and physicians'      services
bPartial  expenditures.

Increase in number-of services
customarily provided to hospital            patients

        Some physicians     are prescribing       increased amounts of
diagnostic    work for patients.         Hospital     and other medical
officials    stated that malpractice         suits had provided "an
incentive"    to  physicians      to request   additional     tests for
their patients.       The increase in the number of malpractice
suits discourages       selective    use of diagnostic       and other



                                    34
hospital services,  and, of course, the more these          services
are used the higher the charges to the patients.

       The total number of laboratory       tests performed at many
of the hospitals     we visited   increased substantially        from ,
1966 to 1969. The increase was about 100 percent at one
hospital.     Part of the increase in laboratory         services was
attributable     to new procedures,    such   as testing   of amniotic
fluid    of pregnant women for Rh incompatibility         and immuno-
fluorescent     examination   for renal biopsy study which pre-
viously was a research procedure.

        The trend in many of the radiology     departments we
visited    was toward more service.      For example,  one depart-
ment's inpatient      work load increased from about 9,000 ex-
aminations      in 1966 to about 16,000 in 1969, but the increase
in the number of inpatients       during this period was slightly
less than 10 percent.       At another hospital,    the number of
radiology     tests given per admission increased from 1.31
in 1965 to 1.63 in 1969.




                                  35
PROSPECTSFOR FUTURE HOSPITAL COSTS

        The Blue Cross Association      has reported that the in-
crease in hospital     costs is the result       of many different
factors.     Some of the factors     influencing    increases in hos-
pital    use are population   growth, the increase in the avail-
ability    and number of hospital     beds, and the increase in the
number of persons having some form of third-party              health
care insurance.     Consideration     of these factors      indicates
that the Nation will experience a further           increase in medi-
cal expenditures    if the current trend in hospitalization
continues.

Population     growth

       The civilian population        and total  number of hospital
admissions increased   steadily        during the period 1965-69,        as
follows:

                                Percent          Hospital       Percent
               Population       increase        admissions    increase

1965           191,894,000         -            26,463,OOO         -
1966           193,767,OOO        0.98          26,897,OOO        1.6
1967           195,666,OOO          .98         26,988,OOO        0.3
1968           197,560,OOO          .97         27,276,OOO        1.1
1969           199,685,OOO        1.08          28,254,OOO          .4

      The Census Bureau projects      a further    increase of over
10 million    persons in the Nation's    population     by fiscal    year
1975.    Therefore,   on the basis of past experience,        an in-
crease in the total number of persons to be hospitalized              and
in related    medical expenditures    seems likely.

Availability     of hospital   beds

       The total    number of hospital  beds in community hos-
pitals    has increased from about 505,000 in 1950--about      3.35
beds per thousand population--to       about 806,000 in 1968--
about 4.08 beds per thousand population.        The Blue Cross As-
sociation    reports   that beds per thousand population  is one
of the best predictors      of total hospital  use.



                                      36
     The trend in number of beds per thousand population              has
been steadily   increasing    while the hospital       occupancy rate
also has been increasing.         This indicates    that as more beds
are made available    they are used and supports the contention
of several hospital     authorities    that,   in the health indus-
try, supply may create its own demand.

Third-party    health    care     insurance

       A Blue Cross Association            study shows that persons who
have some form of third-party             health care insurance       are
likely    to use hospital     facilities        more often than persons
who have no insurance and that insurance coverage has a re-
lationship     to hospital    use.       In addition,    the following
table,    prepared from data included            in a Social Security      Ad-
ministration     publication,      indicates       that an increasing     per-
centage of total       expenditures        for hospital    care is being
paid by persons who have some form of third-party                  insurance.
                       Consumer
                       expendi-                   Payments
                       tures for                   made by
                     hospital   care               private
       Year             (note a)                  insurance       Percent

                                (billions)

        1950              $1.9                      $0.7               37
        1965                8.3                      5.8               70
        1968                9.9                      7.3               74
% xc Idu es public expenditures,such                 as those   for   the Medicare
 and Medicaid programs.

On the basis of prior   experience,    it seems that in the fu-
ture,  as more people are covered by insurance,       more expendi-
tures will be made for hospital     care.   According   to esti-
mates, about 35 million   persons have no hospital      insurance
coverage.

      Pertinently,     there      is growing agreement among medical
experts that good health            care is a basic human right     of all
Americans,    regardless     of     their  ability  to pay.  Additionally,
there is growing concern            that the rising   cost of health
care is pricing     persons       out of the market and widespread

                                             37
feeling that everyone must eventually        be covered   by some
form of national  comprehensive health       insurance.

      Since experience has shown that as more persons become
insured more use is made of medical facilities,   a national
health insurance program probably would further          escalate   the
cost of health care.        The above statement is predicated      on
the following     observations:    in the early days of voluntary
health insurance,     when only hospitalization     was covered, the
result   was more hospitalization     by the insured and, when
coverage was expanded to include surgical         procedures,    more
surgical   services were furnished      to the insured.




                              c
                                   38
                              CHAPTER5

          FXTENT THAT HOSPITAL COSTS MIGHT BE REDUCED

        Medical officials     believe that reducing unnecessary
hospital     admissions and shortening      the lengths of stay of
hospitalized     patients   to the minimum number of days needed
for good quality       care can reduce medical care costs signifi-
cantly.     Attempts currently      are being made to control     unnec-
essary hospital      admissions and lengths of stay, but current
patterns    of health insurance provide little        incentive   to
discourage unnecessary hospitalization.            Studies indicate
that the prepaid group practice         method for delivery     of med-
ical care may be more economical than the more common fee-
for-service     method.
        Other methods being used to control       hospital    costs in-
clude the sharing of service agreements by hospitals,              use of
utilization      review committees,1   pre-admission-testing       pro-
gr-,        employee incentive  programs, and hospital       reimburse-
ment incentive       programs.  Our study of these methods showed
that some progress was being made; however, serious practi-
cal problems, such as those indicated         in this chapter,      must
be overcome if these methods are to be successful             on a large
scale.

CURRENTHOSPITAL DELIVERY SYSTEM
MILITATES AGAINST CONTAINING COSTS

      Some medical officials    feel that current hospital    cost
problems are inherent     to the system used for the delivery     of
medical care and that the system must be changed to achieve
a significant  impact in reducing or containing     hospital
costs . But there is no general agreement as to what format
the change should take or from where the impetus for change
should come.


1
 An organized activity,   usually consisting   of physicians,
 which evaluates quality,   quantity,  and timeliness    of the
 medical care provided.



                                   39
       The current     system can be characterized           as a random
growth of the methods used by a large number of uncoordi-
nated and independent nonprofit            hospitals.       There is vir-
tually   no competition      among hospitals,         and the investment
risk has been minimized by the insurance reimbursement meth-
ods which, in general,        ensure recovery of reasonable costs.
Consequently     there has been little        incentive      for hospitals    to
reduce costs.       Further,   because     hospitals     have   not adopted
uniform cost accounting        systems, it is impracticable,           if not
impossible,    to make specific        cost comparisons for use in
evaluating   the relative      efficiency     of individual       hospitals.

       To improve the efficiency       and effectiveness    of the ex-
isting    medical care delivery      system, areawide health plan-
ning agencies have been created to set health goals and to
decide how to achieve those goals most effectively            with
available    resources.     Most of these agencies are in the de-
velopmental     stages and have not yet had a significant          impact
on the existing      system.   The agencies have experienced        se-
rious organizational       and functional     problems which must be
resolved before the agencies can expect to significantly              re-
duce or contain future hospital          costs.

NEED FOR HOSPITAZTZATION

       The number of hospital        admissions in the Nation has
been increasing;      in  1969   there  were over 28 million   admis-
sions.     The president-elect       of the American Hospital   As-
sociation    has said that as many as 20 percent of high-cost
hospital    beds often are occupied by persons who do not
really    need them. Other medical officials         feel that, by re-
ducing the significant        number of unnecessary hospital     admis-
sions, cost reductions         can be made.

      A major reason for unnecessary admissions is that the
medical system is geared to treating        persons in hospitals.
Most insurance policies     cover costs related        to hospitaliza-
tion but do not cover all nonhospital          care.     Pertinently,
an American Hospital     Association  official       said recently     that
the patterns    of health insurance tended to encourage unnec-
essary hospitalization     and that they must be reversed.

     A study of the Federal employees program, which covers
over 7 million persons,  indicated that the use of hospitals

                                      40
was influenced     by    the type of health insurance coverage.
For example, data        for one Federal employees program policy,
offering   outpatient        care and comprehensive hospital        benefits
showed significantly          less use of hospitals    than did data
for policies     which     basically  offered benefits     primarily     for
hospital   inpatient       treatment.

       Currently    the Sacramento County Medical Society,            Sacra-
mento County, California,       is sponsoring an experimental            pro-
gram to find ways of reducing hospital           costs.      One objective
of the program is to determine whether hospitalization                 is
medically    necessary.     The need for hospitalization         for an
individual     patient  is reviewed by a center which matches
the diagnosis made by the physician          against a set of norms.
If the center does not certify          that hospitalization       is
needed, the participating       insurance carrier       will not guar-
antee payment if the patient        is admitted to a hospital.            Al-
though the program apparently         is successful,      there are no
indications      of its wide acceptance by hospitals,          physicians,
and insurance carriers.




                                       41
L;ENGTHOF HOSPITALIZATION

       From 1960 through 1969, the average length of stay per
hospital     admission has steadily      increased.     In 1969 it was
8.3 days, an increase of seven tenths of a day from 1960.
The American Hospital       Association     has estimated     that, at
current prices,      one tenth of a day in the average length of
stay costs $1 billion       a year.     Association   officials     attrib-
uted this      increase to the Medicare program and to the
availability      of more complex treatments,       but no studies
have been conducted to determine what part of the increase
applies to each reason.

       Our analyses of available     statistical      data showed that
the average length of stay varied widely among the geo-
graphic regions of the country and that it consistently
tended to be longer in the eastern part of the country than
in the western part.       It is generally      accepted that the
lengthsofstay       for comparable diagnoses depend, in large
parts   on  professional   mores which differ      widely from region
to region.

      Also available  statistics   show differences      in the
average length of stay by geographic region compared to the
number of residents  per available    hospital    bed.     Regions
which had a greater number of residents        per available     bed
frequently  had a shorter average period of hospitalization,
as shown below.

                                         Calendar   year 1968
                                                    Number of residents
                           Average length               per available
 Census Region             of stay (days)              hospital    bed

Pacific                            7.1                       270
West South Central                 7.3                       256
Mountain                           7.4                       240
East South Central                 7.5                       263
South Atlantic                     8.0                       277
East North Central                 8.7                       245
New England                        8.9                       237
West North Central                 9.0                       196
M%ddle Atlantic                    9.9                       236



                                   42
      Also we noted, in comparing data for 1967 and 1968,
that in seven of the nine regions the average length of stay
had increased while the potential   number of residents  per
available  bed had decreased.   For example, in the Mountain
Census Region the number of residents   per bed had decreased
from 255 to 240 but the average length of stay had increased
from 7.1 days to 7.4 days.

       American Hospital   Association    officials     stated that,
although they were concerned with such regional             variances,
there might be valid reasons for them.             The association
currently    has no data to indicate     what these reasons may be.
Furthermore,    it has no authority     to take corrective         action
if it is needed.     American Medical Association          officials
could not explain the differences,but,           like the officials
of the &nerican Hospital     Association,      they are an advisory
group,

       Blue Cross Association     stated that one of its primary
responsibilities      was to reduce hospital   stays and that it
currently     was studying the variables.     The Blue Cross As-
sociation      feels that the average length of stay can be re-
duced by controlling      the number of available   hospital   beds
but that the cooperation       of hospitals  and physicians  is
necessary to influence       a change.

      Analyses of statistical      data furnished  by the Blue
Cross Association   indicates     that the type of insurance
coverage held is a factor      to the average length of stay.
On the average, subscribers       having the high-option     coverage
under the Federal employees program stayed in the hospital
longer than subscribers      having the low-option     coverage for
the same types of care, as shown below.
                                                Average        length    of stay
                     Medical      treatments                                       Surgical     treatments
             Individual                       Family                       Individual                          Family
              policies                      policies                        policies                         policies
           High             low         High            LOW              High             LOW         High                 LOW
  Year    option         option        option        option             option         option        option             option



  1966     10.9             8.2           7.9          6.4               10.2            7.6             6.8               6.1
  1967     10.9             8.4           8.1          6.5                9.9            7.1             6.8               6.1
  1968     11.1             8.7           8.3          6.8               10.0            7.2             6.9               6.1
  1969     11.1             8.9           8.3          6.9               10.0            7.8             6.9               6.2




                                                          43
       An experimental     program to reduce the average length
of stay is currently       under way in the Pacific      Census Region,
which now has the shortest        average length of stay in the
country.      The program objective,     besides determining     whether
hospitalization      is medically    necessary,  is to determine how
long a patient      should stay in the hospital.       According to
the Blue Cross Digest,        the program, which monitors physician
and hospital     practices    from preadmission    to discharge,   re-
duced the patient-days        to 23.6 percent below the national
average and saved $541,800 in its first          141 days of opera-
tion.




                                  44
POTENTIAL METHODSFOR
CONTAINING OR REDUCING COSTS

       Research of medical literature    and discussions     with
medical officials      have shown that many methods are being
tried to reduce the rate of hospital       cost increases.      Some
of the more widely suggested methods are service-sharing
agreements, utilization      review committees,   pre-admission-
testing   programs, employee incentive     programs, and hospital
reimbursement     incentive  programs, which are discussed be-
low.

Service-sharing      agreements

       The American Hospital    Association   supports the concept
of voluntary    sharing of services by two or more hospitals.
A recent joint    study-- sponsored by the association       and by
the Department of Health, Education,        and Welfare--concluded
that shared services possessed the best potential          for cost
reduction    or containment   in hospitals.

        There are many cases where hospitals         voluntarily     par-
ticipate     in service-sharing     agreements, such as those in-
volving    computer programs, blood banks, laboratory            services,
and in-service      education programs.       We were informed that
over 100 potential       shared- service projects     were available
for use.       There are, however, many hospitals        which prefer
to operate independently         and which are not participating          in
sharing programs.        No information    is readily    available     on
the number of sharing programs in use by hospitals,                but the
American Hospital       Association    is currently    taking an inven-
tory.

        Some of the factors mentioned by the American Hospital
Association    and hospital  officials   as being obstacles  to
further    acceptance of service-sharing    agreements were:

       1. Prestige.     Most large community hospitals  want the
          capability    of providing all types of diagnostic   and
          therapeutic    services.

       2. Sharing    of medical    facilities    was opposed by some
          doctors.


                                       45
      3. Difficulty of getting          cooperation,      Some hospitals
         feared loss of their         identity.

      4. Legal implications.       Until 1968 the Internal     Revenue
         Service rules discouraged joint      enterprises    and
         shared facilities     were not tax exempt.      Recent leg-
         islation     provided for tax exemption of joint      enter-
         prises undertaken by tax-exempt hospitals,         but hos-
         pital    laundry cooperatives   were not included in the
         exemption.

      5. Hospitals    did not like to share the "profit        areas"
         of their operation,       Pertinently,   we found   that
         hospital    charges were based on recovering      total hos-
         pital    expenses plus a small amount for growth and
         development,     which we term "profit."      The hospitals
         did not always try to recover costs of each partic-
         ular service through the charges for that service.
         Consequently,     revenues from some services showed
         losses and others showed profits.

       We found that some hospitals          had installed        expensive
equipment that duplicated           the equipment and service of
neighboring      hospitals   which were experiencing          low utilization
rates of the particular          equipment.      For example, one hospital
had three radiation        therapy units,       one of which initially
cost about $500,000.          These units were capable of treating
80 patients      a day, but the hospital         was treating       about 60
patients    a day.      The units were also expensive to operate
because of the requirement           for highly skilled       operating     em-
ployees.      Two other hospitals        in the same area each had a
radiation     therapy unit.       One hospital     performed about 500
treatments     a month,or about 17 a day; the other would not
estimate    the number of treatments          it performed.        We believe
that these circumstances          indicate    that there is potential
for better utilization         of expensive equipment,          i.e.,   han-
dling the total       area requirements      with fewer units that are
operated on a shared basis.

       A Presidential    commission recently  found that,           of 777
hospitals    having facilities    to perform open-heart           opera-
tions,    250, or about 32 percent,    had not performed           any such
operations    during the year the commission made its              study;
476, or about 61 percent,      had performed less than            one such

                                       46
operation  a week; and 225, or about 29 percent,      had per-
formed less than one such operation      a month.  An  article in
a national  publication  stated that in 1968, 20 hospitals     in
New York City offered   open-heart   surgery but that five of
them had performed two thirds     of all such surgery.

Utilization      review   committees

       Hospital      utilization      review committees,        consisting     pri-
marily of physicians,            were   the    first mechanisms      established
to review length of hospitalization,                 but this was not the
committees'only          concern.     American Hospital       Association      and
American Medical Association               officials    informed us that uti-
lization   review committees could be beneficial                   if used to
determine whether the amounts and types of medical services
prescribed      for the patients         were justifiable       and consistent
with the diagnoses.             Although utilization        review has con-
tributed    to the control          of cost per inpatient        by establish-
ing patterns       for hospital       care, the reduction        of hospital
costs is not the primary concern of the committees.

       Although some committees have been effective,         the
American Hospital    and American Medical Association        officials
were unable to comment on the overall       effectiveness      of such
committees.     Reasons given by the associations       were that
good data for a statistical     study of utilization      review
committees were not available      and that the scope and activ-
ities   of such committees varied widely from hospital           to hos-
pital.

        Although generally     cases were selected for review on
a random basis, the criteria        used by committees for select-
ing such cases varied widely.          Also some hospitals    treat
committees as an educational        program.   For example, one
hospital     immediately   places all new physicians     on the uti-
lization     review committee for a 6-month period.        At another
hospital     the stated purpose of its committee was:

       'I*** a fact-finding,         educational      instrument   of
        the Medical Staff        designed to improve patient
       care and to assure         that all the in-patient         service
       given is necessary         and could not be provided as
       effectively     in the     doctor's    office,      the home, the
       out-patient     service     department.        The committee has

                                        47
no disciplinary       function,        is not a police body,
nor a scientific        research group attempting          to
measure the precise magnitude of over or under
utilization.      It is intended that, in general,
the attending     physician        will make all decisions
regarding    hospital      utilization       of his patient,
but it is hoped that all medical staff                members
and all clinical        departments will use comparable.
standards and policies."
Pre-admission-testing        programs

        Pre-admission-testing       programs are being used by some
medical officials        to lower hospital       costs through reducing
the average preoperative         hospital     stay for selected      diag-
nostic cases.        Performing    selected preoperative       tests on an
outpatient     basis prior to admittance of the patient              to the
hospital     can reduce the patient's         hospital   stay.    Pre-
admission-testing        programs appear to be operating          effec-
tively     in certain    geographic regions.         Such programs are
not yet widespread,         and certain    innate problems, as indi-
cated below, must be solved before the programs will have a
significant      impact on hospital       costs.

        Officials     of the American Hospital           Association   and the
American Medical Association              agreed that a major obstacle
preventing        general acceptance of pre-admission-testing              pro-
grams was the current medical care delivery                   system,   Tradi-
tionally,       physicians     have determined and controlled          the
type of diagnostic          testing    to be performed after the patient
is admitted to the hospital,                Some officials     feel that es-
tablishing        a set of tests to be administered            on an outpa-
tient basis before a patient              is admitted to a hospital
challenges        the position      of the physician       as the person who
directs      and controls      diagnostic     testing.

       Other problems that have been cited as preventing                  gen-
eral   acceptance of preadmission testing  are:

       1. It   is not available      under    all    insurance    programs,

       2. It may not be readily   accepted by hospitals operat-
          ing at a low average-occupancy   rate where greater
          turnover  of patients may mean more empty beds.

       3. A patient  may feel that it is more convenient   to
          stay in the hospital   for tests because of the dis-
          tance of his residence from the hospital   and for
          other reasons.

       4. Physicians want assurance           that    the tests    are cur-
          rently   valid.




                                        49
       Hospital   officials     had different       opinions regarding       the
benefits    of preadmission       testing.      One hospital     administra-
tor said that the pre-admission-testing                concept was excellent
and could save many days of health care.                  Another hospital
administrator     said that preadmission          testing    had been tried
at his hospital      but that the ensuing problems had caused the
program to fail;       he stated that the program had inconve-
nienced the patients.          Other hospital       administrators     stated
that the physicians         apparently     felt that such a program was
an inconvenience       to both themselves and the patients             and
that significant       cost benefits       from the use of a pre-
admission-testing        program might not be realized           immediately.

Employee incentive       programs

       Various employee incentive           programs are being used by
some hospitals,      but the number of hospitals             using such pro-
grams is not known,         American Hospital         Association     officials
observed that most employee incentive                programs currently
being used were ineffective,           p rimarily     because the hospital
industry    lacked standards to relate            productivity      to job as-
signments.      Therefore,     since the industry         has not determined
a way to measure the extent to which incentive                   programs have
affected    hospital    costs, it appears that the cost impact of
such programs cannot be measured.               Until    a monetary effect
on hospital     costs can be demonstrated,            it appears unlikely
that employee incentive          programs will become widely accepted
by the hospital      industry.

        Although the American Hospital              Association    has no for-
mal policy regarding           employee incentive        programs, the asso-
ciation     does support experimentation             with such programs and
believes     that there is some potential             for them in improving
the productivity          and efficiency     of hospital      employees.    Be-
cause of the lack of employee work standards,                   association
officials      feel that, at the present time, the development
and use of employee incentive             programs depends solely on
the ability,       initiative,       and qualifications       of individual
hospital     administrators.

      A recent study of employee incentive    programs jointly
sponsored by the association    and the Department of Health,
Education,   and Welfare concluded that work standards should
be determined and tested before incentive     programs were


                                       50
initiated.    The study concluded also that the skills     re-
quired to develop such standards were not usually      available
in hospitals.

        Our contacts with officials           at the 12 hospitals   we
visited    indicated    little     enthusiasm for employee incentive
programs,     and  many   of   the  hospitals    had no such programs.
Some regional      association      officials    considered incentive
programs to be inappropriate             for hospitals,    and some hospi-
tal administrators        felt that incentive        programs were diffi-
cult to manage and somewhat ineffective.

        One authority    in the field  of medical economics be-
lieves that there may also be a legal difficulty              associated
with the use of employee incentive        programs and that re-
strictive    Federal tax policy could be disastrous          by discour-
aging innovative      personnel policies,      The   legal  difficulty
concerns the question of whether a tax-exempt,             nonprofit    in-
stitution    can legally    operate a profit-sharing       program with-
out jeopardizing      its tax-exempt s,tatus.




                                     51
Reimbursement     incentive     programs

       There is general agreement that the current method for
reimbursing     hospitals--    a cost-based method--provides         little
incentive    for hospitals      to control     their costs.    Although
the American Hospital         Association,     the Blue Cross Associa-
tion and the Federal Government are all conducting                studies
and experiments      to identify     reimbursement methods that will
provide incentives        for cost control,       it appears to us that
no one knows which method will            succeed at controlling       hos-
pital   costs in the near future.

       American Hospital        Association    representatives      stated
that current reimbursement           experiments     involved the use of
pre-negotiated-rate         programs, i.e.,      target rates established
for a defined period of time.             Hospitals     whose costs are
lower than the target rates receive incentive                 awards, and
hospitals    whose costs exceed the target rates are assessed
penalties,      Participation      in such programs is voluntary           on
the part of hospitals.

        Association   representatives     stated further    that it was
too soon to determine whether the association's             experimental
program would be accepted by a majority          of the hospitals.
In general,      they believe that any incentive       reimbursement
system, including       the pre-negotiated-rate     program, will be
supported only to the extent that hospitals            can expect to
realize    economic gains.

       Association    officials    believe that the differing    needs
of individual      hospitals    operating  under poor budgeting
practices     and an inadequate central      cost accounting system
at many hospitals       have made the implementation     of a pre-
negotiated-rate      program very difficult.

      The Blue Cross Association      does not, at the present
time, specifically      endorse the use of any one incentive       re-
imbursement method over another.        The association    believes
that continued experimentation      is necessary.     About 12 of
the 80 Blue Cross Plans have adopted a pre-negotiated-
reimbursement     method or are now experimenting     with one. Of
the 12 Plans, seven are located in New York State where the
method is required by law.



                                     52
        Blue Cross Association      officials    believe that accep-
tance of a pre-negotiated-rate           method or any other incentive
reimbursement method depends on the design of the method
and the degree of risk involved to the hospital.                According
to Blue Cross Association         experience,    some hospital    adminis-
trators     are uncertain    as to whether they have authority         to
commit their hospitals        to rate agreements and others have
refused to enter into commitments because of the risk in-
volved.      Further,   one Blue Cross Official        is quoted in a
publication      as having asked what incentive          there was for
hospitals      to try anything different       as long as they could
get full     cost reimbursement.

       The Federal Government is encouraging experiments with
incentive   reimbursements   methods.     In 1967 the Secretary  of
Health,   Education,  and Welfare was authorized     to develop
and engage in such experiments.         As of March 12, 1970, the
Department had conditionally       approved only five reimburse-
ment experiments which are in the States of New York, Con-
necticut,   Maryland,  and California.      This has been regarded
as a disappointingly     slow start.
Prepaid    group   practice

      A different      type of program concerning        the delivery
of medical care, currently          being used on a small scale, is
the prepaid group practice         method.   The prepaid group prac-
tice method may be defined as a program which makes avail-
able comprehensive medical care services and which is based
on the principles        of prepayment, group practice,       preventive
medicine,    voluntary     enrollment,   and interrelated     hospitals
and medical offices.

        Several studies have indicated       that the prepaid group
practice    may be a more economical method of delivering          med-
ical service than the more common fee-for-service            method.
Officials     of the American Hospital     Association,   the Ameri-
can Medical Association,      and the Blue Cross Association
stated that they were currently        either    studying or plan-
ning to study the prepaid group practice           method to deter-
mine the validity     of the economies being claimed for it.
None of these associations      are opposed to the method.

        A major difference      between the fee-for-service              method
and prepaid group practice          method is that,       in contrast       to
the limited     incentives    that the fee-for-service            method
gives to hospitals       and physicians       to control     their costs,
the prepaid group practice          method provides hospitals             and
physicians     with monetary incentives.            The economies claimed
for the prepaid group practice           method stem from reducing
unnecessary doctoring        and lengths of hospital           stay and in-
creasing outpatient        and preventative       treatments.       The econ-
omies also are attributed         to the fact that the prepaid
group practice      method reverses the tendency under the cus-
tomary method to stimulate          hospitalization      and instead mo-
tivates    physicians    to control    and limit      hospital     utiliza-
tion to the minimum considered           to be essential        by physi-
cians.

       A published   study of the Federal employees program
indicates   that, under the Blue Cross-Blue           Shield Plan and
the Aetna Indemnity      Plan, utilization       in terms of patient-
days per 1,000 insured persons has been twice as high as
under the prepaid group practice          method.     This is shown
below for nonmaternity      hospital     services under the high-
option portion     of the Federal employees program.
                                        Patient-days    per
                                     1,000 insured persons
          Plan                    1961-62        1963-64    1967

Blue Cross-Blue Shield              882              919            914
Aetna                               760              949            945
Prepaid group practice              460              453            394

       The same study shows (see table below) that an average
8.2 percent of the subscribers         of prepaid group practice
plans received care on one or more occasions during 1967
compared with an average 28 percent and 25 percent for Blue
Cross and Aetna subscribers,         respectively,   and that the
prepaid group practice        plans hospitalized   about half as
many persons as did the other plans and provided substan-
tially   more out-of-hospital       service than did Blue Cross-
Blue Shield or Aetna.

                                      Subscribers       receiving
                                        benefits       in 1967
          Plan                     Any benefits             Inpatient

                                                 (percent)

Prepaid group practice                    81.9                   4.5
Blue Cross-Blue  Shield                   27.7                  10.0
Aetna                                     24.9                   9.0

The above statistics     for Blue Cross-Blue Shield and Aetna
may be understated    to the extent of care furnished  under
applicable  deductibles.

      Also the rates of hospitalization       for surgical   opera-
tions in 1967 differed  substantially,       as shown below.
                                                 Inpatient   rates
                                                per 1,000 insured
                                                 persons in 1967
                                            Blue Cross-    Prepaid group
                                            Blue Sheild      practice

Tonsillectomy   and adenoidectomy                7.3                2.4
Appendectomy                                     2.1                1.4
Cholecystectomy                                  1.9                1.0
Female surgery                                   8.6                4.8

The differences did not seem to be explained by the differ-
ences in ages of the subscribers  because differences still
existed when comparing annuitants  and when comparing active
employees.

      The study concluded that prepaid group practice              plans
showed a relatively      high utilization      of outpatient     services
and a relatively     low utilization      of inpatient    services and
that the utilization      data had a considerably        broader poten-
tial application     than only to the Federal employees program.
Several other evaluations        of prepaid group practices        con-
firm the results     of the Federal employees program study.

      The Public Health Service is encouraging the growth of
prepaid group practices   and is facilitating the establish-
ment of prepaid group practice   plans in 24 cities.   Financ-
ing has been made possible by section 3 of the Comprehensive
Health Planning and Public Health Services Amendments of
1966 (Pub. L. 89-749, approved November 3, 1966).

        The growth of prepaid plans has been slow.   In 1968
about 2 percent of the population    was covered by these plans
and there were only 17 prepaid plans in the country;      the
largest    plan had about 2 million subscribers.   Some of the
reasons for the slow growth are:

     1. Plans are available         only    in selected   geographic
        areas.

     2. Members face     problems      when traveling     outside    the
         area where their      plans    operate.

     3. Legislation     bars   such plans      in 17 States.

                                       56
     4. Choice of physicians      is limited.

      5. Funds for   expansion   are limited.

      OCHAMPUSofficials        stated that new methods should be
developed to deliver      quality    health services more economi-
cally than the current method.           They said that they were
studying the prepaid group practice           concept and would like
to initiate    a pilot  program for CHAMFVS; probably for re-
tired military    beneficiaries,      a relatively    less mobile
group than dependents of active duty personnel.




                                   57
Planning    and coordination        of hospital      services

      Areawide planning is in its infancy,          and there is dis-
agreement between the major national         health organizations
as to what type of plan will function         best.    The American
Medical Association,      for example, favors voluntary        planning
groups 2 whereas the American Hospital        Association    feels
that voluntary    planning groups cannot be effective          without
State legislation     supporting  enforcement of the decisions
of such groups on all hospitals       within   the area.

       American Hospital       Association    officials  stated that it
was highly unlikely        that effective     planning would result  in
any significant     reduction       in the cost of health care ser-
vices.    They  also   felt    that   planning should be concerned
with assessing the total health care needs and with ensur-
ing the most efficient         use of resources consistent      with
those needs.

      Most community hospitals         providing       short-term      care are
independently    operated,     nonprofit     institutions        which    lack
the incentives    to participate       effectively        in regional       plan-
ning systems.     The majority      of these hospitals           function      un-
der cost-reimbursable       formulas which provide little               incen-
tive to contain costs.         We believe that there is consider-
able evidence that these circumstances               have served to stim-
ulate hospitals     to generate the capability             of providing        a
complete range of services within            each hospital         and that
these conditions      could impair effective           cost management of
areawide health services,

       Planning agencies have been established        under the joint
support and cooperation        of Federal,  State, and local gov-
ernments and the voluntary        efforts  of some hospitals,       phy-
sicians,    insurers,    and community officials.     They have not
been successful       in gaining widespread support and generally
lack authority      to establish   and implement comprehensive
health care plans.        Thus the growth of hospital     facilities
and services has, for the most part, been uncoordinated               and
unstructured.

        The Comprehensive Health Planning and Public Health                    Ser-
vices    Amendments of 1966 authorized  the making of grants                   to
States for establishing     and operating   comprehensive plan-
ning agencies with the objective      of organizing   each State's
total health resources toward providing       comprehensive
health services.    Participation    on the part of individual
hospitals  was to be voluntary,

      It   was initially    estimated that the development of a
sophisticated     level of comprehensive State and regional
planning,     as envisioned under the act, would take from 3 to
5 years.      At a conference on comprehensive health planning
sponsored by the American Hospital        Association    in October
1968, some 2 years after passage of the act, it was found
that development had not progressed as anticipated           and that
implementation      would take longer than anticipated,,

         Major problem areas cited as restraining            development
of comprehensive planning were (1) lack of qualified                 per-
sonnel, (2) uncertainty       as to who controlled         the planning
process and had final authority          in the total     planning struc-
ture, and (3) the relationship          of‘the   statewide     planning
agencies to the hospitals         and to existing     voluntary     health-
planning agencies.       Hospital    administrators      were concerned
that their hospitals'      participation       in these planning ef-
forts would result      in loss of autonomy and would prohibit
their retaining      the mobility    to meet their      separate respon-
sibilities.

        It seems to us that voluntary          participation        in effec-
tive areawide planning systems requires                that all aspects of
hospital      operations     and all decisions made regarding           the
size, scope, and extent of hospital              services     should be sub-
ject to review and approval by an external                 group.     This
would result,       of course, in some reduction           in the authority
and independence of each institution               and would challenge
institutional        status and prestige.        It would also require,
in some cases, that individual           institutional        goals be tem-
pered and modified to conform to the objectives                   of the area-
wide or regional         planning structure.

      Establishment  of effective,      but purely voluntary,     hos-
pital planning systems is, at best, a long-range          process
under these circumstances.        The need for areawide planning
systems seems to be desirable,       if not essential,    to achieve
more effectiveness,   efficiency,      and economy in providing

                                      59
hospital     services.  Also the success of such systems depends
not only on the ability        to gain the full   support of hospi-
tal management but also on the full cooperation             of physi-
cians and third-party      insurers.     The physicians     determine,
to a great extent,     what types and levels of ser-+ice capac-
ities    the hospitals  must maintain and also the extent and
frequency of hospital      utilization.     The third-party      in-
surers are an integral      part of the system, because they are
a major source of revenue for hospitals.

      In addition,    the support of the associations             represent-
ing the industry    is also needed.       Principal    officials        of
the American Hospital      Association    informed us that, although
they were in favor of areawide health planning agencies,
they felt that planning should be linked to hospital                  reim-
bursement methods.       In their   "Statement on the Financial
Requirements of Health Care Institutions            and Services"
dated February 12, 1969, the association            set guidelines         for
a program to overcome the financial          shortcomings       that had
plagued health care institutions.           The guidelines        provided
that purchasers    of care, collectively,        meet the full finan-
cial requirements     of the institutions      providing      that care.

      The statement provided also that health care institu-
tions have an essential     role in (1) the designation  of the
areawide health planning agency and (2) the development and
implementation   of areawide health plans which recognize the
total  needs of the community and the interrelationships
among health care institutions     serving that community.

        Principal     officials     of the Blue Cross Association  in-
formed us that they substantially            endorsed the full reim-
bursement and compulsory areawide planning concepts of the
American Hospital          Association.    American Medical Association
officials      informed us that, since planning groups were in
the infant       stage and had yet to prove their effectiveness,
it would be premature to say whether they should have fiscal
responsibility.
       To date little  progress has been made in implementing
the American Hospital     Association     program.    By the end of
1969, only six States had enacted legislation           which would
sanction the decisions     of areawide planning agencies.        The
six States use the licensing       authority    as the governmental
sanction for enforcing     planning decisions.
                                      60
                               CHAPTER6

                REASONABLENESS
                             OF COSTS PAID FOR

                     ADMINISTRATION f3F CHAMPUS

       Our review showed that the administrative          costs paid by
OCHAMPUSto the Blue Cross Association            and selected Blue
Cross Plans--hospital       fiscal  agents--for    processing   CHAMPUS
hospital    claims were, for the most part, allowable          under
contract    provisions.    OCHAMPUShas exercised little         or no
managerial control      over the fiscal     agents, however, and op-
portunities     for cost reductions     had not been identified      or
had not been acted upon by OCHAMPUSofficials.

      We estimated that more effective          management of the pro-
gram might have resulted      in substantial        savings.    For ex-
ample, we were able to identify         potential      savings of $60,000
if CHAMPUSwere to take advantage+of            differences     between
Blue Cross Plans and Mutual of Omaha claim-processing                 rates
in some geographical     areas, potential       additional     savings if
OCHAMPUSwere to award contracts          on a competitive       basis to
the lowest bidders,    and potential       savings of $80,000 if the
Blue Cross Association's      duplicate     claim review procedure
were eliminated.

       Further reductions        in administrative     costs could result
from improved control          and direction     of the activities    of the
individual     fiscal    agents,    For example, savings in excess of
$200,000 a year could be effected            if a way could be found to
eliminate    the significant       number of claims being returned by
Blue Cross Plans to hospitals            for revision.     Additional   sav-
ings would result        from eliminating      the same problem for the
other prime contractor,          Mutual of Omaha, and from raising
the efficiency        of those Blue Cross Plans which may be operat-
ing less efficiently         than others.

CONTROLOVER PERFOF?MANCE C)F
HOSPITAL FISCAL AGENTS NEEDS IMPROVEMENT

     OCHAMPUSis responsible    for negotiating   and administer-
ing contracts with fiscal   agents and for such other functions
as budgeting of and accounting    for program funds, analyzing


                                    61
statistical      data, and preparing and distributing     educational
material      about the program to beneficiaries     and hospitals.

       OCHAMPUScontrol    over the performance of the individual
fiscal   agents-- the Blue Cross Association,   the Blue Cross
Plans, and Mutual of Omaha--needs improvement.        This is evi-
denced by the continued rise in administrative       costs and by
the wide variances    in administrative   rates of the fiscal
agents to process claims.      The rates ranged from $1.25 to
$8.64 per claim in fiscal     year 1968. OCHAMPUSofficials
were unaware of the causes of these variances.

Continued rise      in costs      of processing
CHAMPUSclaims

     The costs incurred   by CHAMPUSfiscal  agents for process-
ing hospital  claims have recently increased significantly,
as shown in the following   table.

      Blue Cross Association    and 52 Blue Cross Plans
                    Administrative      Number of      Rate per
Fiscal year             expense           claims        clafm

     1967                 $      603,852          178,143    $3.39
     1968                        932,342          204,303     4.56
     1969                     l,849,413a          375,743a    4.92

aData are for      the 18-month period       ended December 31, 1969.

                         Mutual of Omaha
                        Administrative   Number of           Rate per
Fiscal    year             expense         claims             claim

     1967                 $     176,688            88,788    $1.99
     1968                       356,815           119,336     2.99
     1969                       419,536           126,748     3.31

        OCHAMPUSand Blue Cross Association       officials  were un-
aware of the specific       causes of the rapid rise in adminis-
trative   expense.    Officials     of the Blue Cross Plans said
that the rise in costs was due to wage increases,          inflation-
ary increases    in other expenses, and improvements or changes
made in cost-estimating        procedures and accounting   systems.


                                      62
In our discussions  with       Blue Cross Association    officials,
they suggested that two        contributory  causes of the increased
costs were the increased        volume of claims resulting       from the
expansion of the program        by the 1966 amendments and the in-
creased number of family        separations.   (See ch. 2.)

       Our review of the accounting        records and cost data used
by the Blue Cross Association        and four selected Blue Cross
Plans to support the association's           administrative     cost pro-
posals showed that, for the most part, costs claimed were al-
lowable and allocable,    i.e.,     properly     charged for services
rendered and benefits   received.         We did question approximately
 $8,000 of a total  of $152,000 in costs claimed by one Plan
during the period July 1, 1966, to December 31, 1969. The
costs questioned resulted       primarily     from computational     er-
rors by the Plan's accounting        personnel.       The Plan's offi-
cials agreed with our findings         and made the appropriate        ad-
justment.

      In fiscal    year 1968 the administrative    costs of the
Blue Cross Association      and the Blue Cross Plans rose
54.4 percent over 1967. Part of the rise stemmed from a
23.8-percent    increase in Plan employees, primarily     claim ex-
aminers and related      supervisory personnel assigned to
CHAMPUSwork.       During the same period,    however, the average
number of claims processed--accepted       for payment, returned,
or rejected--   by each claim examiner decreased by 8.9 percent,

       The CHAMPUSclaims manager at the Blue Cross Associa-
tion stated that a claim examiner should process approxi-
mately    10,000 to 15,000 claims a year.          From information
furnished     by the Blue Cross Plans, we found that only one of
the 33 Plans having work-load        data had equivalent       full-time
employees who processed more than 10,000 claims each in
1968. The average number of claims processed by each em-
ployee of these Plans was significantly            below 10,000.       There
were approximately     93 equivalent     full-time     employees--in-
cluding supervisors,      computer personnel,       clerks,   and claims
examiners --assigned    to CHAMPUSwork at these Plans.              Of
these 93 employees, 52 were claim examiners who processed a
total of 184,467 claims.       The number of claims processed a
year by each of the 52 claim examiners averaged 3,549.




                                    63
        The following   table, which compares employee produc-
tion and the processing       cost per claim at some low- and
high-volume      CHAMPUSPlans, indicates,       in our opinion,   sig-
nificant    differences    in operating  efficiencies     among the
Plans.

                                  Plan's volume of CHAMPUS
                                   work--fiscal     year 1968
                                 Low volume               High volume
                          --
                               -
                          Plan 1   Plan2      Plan3     Plan4   Plan 5

Nmber of claims
  processed                4,790      4,264      4,133    9,232    12,039
Equivalent      full-
  time     employees:
      Claim examin-
         ers and super-
         visors              1.10         2.01    2.33     1.35      3.50
      All employees          1.28         3.10    4.03     2.23      4.50
Number of claims
  processed per em-
  ployee:
      Claim examiners
         and supervi-
         sors              4,354      2,121      1,774    6,838     3,440
     All employees         3,742      1,375      1,026    4,140     2,675
Cost per claim             $2.57      $4.74      $5.12    $3.70     $6.23

        We believe that the differences        in the cost per claim
among the Plans are not necessarily           due to different       quali-
ties in the claim       review processes among the Plans.            As
stated on page 68,the Blue Cross Association,             which reviews
CHAMPUShospital        claims from all fiscal     agents, questioned
less than 2 percent of the claims in fiscal             year 1968. Also
Blue Cross Association        officials   agreed that the data devel-
oped during our review showed sufficient            evidence to warrant
further    consideration     by them of the potential       inefficiencies
of the Plans in processing           CHAMPUSclaims.

        One contributing  cause for the continued rise in admin-
istrative    costs was the significant  number of claims being
returned by the Plans to the hospitals      for review.    We esti-
mated that Blue Cross Plans incurred     additional    administra-
tive expenses of $226,000 in 1968 for this reason.         Both

                                     64
Blue Cross Association's   and Mutual of Omaha's experience
in returning   claims was about 30 percent of claims received.
This compares unfavorably   with much lower rates for Blue
Cross insurance programs and the Federal employees program.

       Blue Cross Association  officials    were unaware of the
causes of the large number of claims'       being returned.
OCHAMPUSofficials    stated that returned      claims had been a
problem area from the inception       of the program and that a
solution   had not been found.    We were further     informed that
most Plans were taking steps to attempt to reduce the num-
ber of claims being returned.       None of the officials     ques-
tioned were aware of the causes of the wide variances          in
rates per claim charged by Blue Cross Plans.

       We believe that one of the reasons for this lack of
awareness of OCHAMPUSofficials          was that insufficient      effort
was given by OCHAMPUSto reviewing          the performance of its
fiscal    agents.     In December 1967 OCHAMPUScreated its own re-
view team to evaluate contractor         performance and to ensure
contract      compliance,   but this team did not visit       any hospi-
tal fiscal      agents until   September 1970, when it made its
first   visit    to the Blue Cross Association.

      Another reason for the lack of awareness of OCHAMPUS
was the limited   scope of the audit work performed by the De-
partment of Health, Education,    and Welfare's Audit Agency at
the Blue Cross Association    and at selected Blue Cross Plans.
This audit work is discussed in chapter 7.

      On the basis of the circumstances     discussed in this
section,  we believe that improved control       and direction by
OCHAMPUSover the activities      of the fiscal    agents should re-
sult in reductions   in administrative    costs.




                                  65
NEED FOR COMPETITION AND INCENTIVES
TO REDUCE COST OF PROCESSINGCLAIMS

       Our analysis   indicated     that OCHAMPUSmight be able to
reduce administrative      costs and benefit    payments by taking
advantage of certain      differences    between Blue Cross and
Ivfutual of Omaha claim-processing       rates.  Savings might be
realized   from having other insurance firms process CHAMPUS
claims.

       OCHAMPUSis paying a wide range of rates for         processing
hospital  claims.    In fiscal year 1968, Mutual of       OmahaIs
rate per claim    was $2.99 and BlueCross's ratewas        $4.56.
The Blue Cross rate is the average of 52 individual           Blue
Cross Plan rates which ranged from $1.25 to $8.64          per claim.
Of the 52 Plans, 33 had rates higher than Mutual          of OmahaIs
rate.

        Comparison of the claim rate of Mutual of Omaha with
that of the Blue Cross Plans for 1968 indicated        that admin-
istrative    costs could be reduced substantially     by using the
lower claim rate in each geographic area,         For example, Mu-
tual of Omaha processes in Omaha CHAMPUSclaims for 17
States therefore    its cost per claim of $2.99 in fiscal       year
1968 applied to all claims processed,     regardless     of the geo-
graphic area in which the claim originated.         We estimated
that there might have been savings of about $60,000 if the
claims-processing     work of eight Blue Cross Plans, whose
cost per claim was higher,     had been performed by Mutual of
Omaha.
       Also it appears that,     in other geographic areas for
which Mutual of Omaha is currently         processing  CBAMPTJSclaims,
OCHAMPUScould obtain savings by having Blue Cross Plans
process these claims and by taking advantage of the more fa-
vorable reimbursement     formulas with hospitals      that were
available    to some Blue Cross Plans.        (See ch. 3.)  Similar
observations    were reported to OCHAMPUSin February 1966 by
a group from Columbia University        that had studied payments
made by fiscal    agents.

     Blue Cross Association     and Mutual of Omaha have been
the two prime contractors    since 1956 when the program com-
menced. Their contracts     have been renewed on a fiscal-year

                                 66
basis, and no significant          changes have occurred in the admin-
istrative    responsibilities        of the contractors.        In 1956 sev-
eral Blue Cross representatives            assisted    in the development
of the basic statute.           In negotiating      the contracts   for
reimbursing     hospitals     in 1956, the Secretary of Defense pre-
scribed that hospitals          in the eastern and western areas of
the United States be reimbursed by Blue Cross and that hos-
pitals    in the remaining 17 States be reimbursed by an organi-
zation in the insurance industry.              Ultimately    Mutual of
Omaha was chosen as the contractor.

     We believe that OCHAMPUSshould consider using the fis-
cal agent having the lowest claim rate in each geographical
area and, if there are no substantial     differences   in poten-
tial service,  should contract with   the  one   which would be
the most economical.

Incentive-type    contract    needed

      Since the inception      of the program in 1956, OCHAMPUS
has negotiated    cost-reimbursable    contracts with the Blue
Cross Association     and Mutual of Omaha for the administrative
expenses they incur,

      We discussed with Blue Cross Association         officials   the
lack of incentives    in the contracts    for fiscal    agents' re-
ducing administrative    costs by increasing       the efficiency    and
economy of their operations.       These officials     concurred that
the present contract    provisions   lacked such incentives       and
suggested several types of cost-incentive-type          contracts    that
might be mutually advantageous.

        We believe that OCHAMITJSshould consider negotiating
incentive-type     contracts with its fiscal   agents so as to pro-
vide them with practical      encouragement for improving their
efficiency     and reducing their operating   costs.




                                    67
BLUE CROSS ASSOCIATION CLAIMS REVIEW PROCEDURE

      Most of the Blue Cross Association's         effort, as a prime
contractor,    is devoted to processing      and paying hospital
claims submitted against CHAMPUSby the 52 Blue Cross Plans,
as subcontractors.      About $80,000 of the $108,990 paid to
the Blue Cross Association      in fiscal    year 1968 resulted
from the review of individual       claims.     We believe that man-
agement of the overall     operations     of the Plans should be
given increased emphasis by the Blue Cross Association,

        Our review showed that Blue Cross Association     employ-
ees manually performed item-by-item        reviews of data shown
on CHAMPUSclaim forms and that the Blue Cross Plans did the
same. In addition,        four Plans made computer tests of data
similar    to those made by the Blue Cross Association,     five
other Plans made other tests of the data which the Blue Cross
Association     reviewed,    and 10 Plans indicated that computer
edits would be added to their review processes in the near
future.

       The Blue Cross Association's       claims review procedure
makes little     contribution     to the processing  of claims.    The
Blue Cross Association's         computer edit is made to assure
OCHAMPUSthat the data it uses in its reports           are valid.
The Blue Cross Association's         manual review is designed to
check primarily     for missing certifications      and signatures
on claim forms.        In fiscal   year 1968 the Blue Cross Associa-
tion questioned     less than 2 percent of the claims received
from Plans.     No records are kept as to the amounts, if any,
that were involved       in the claims that were questioned.       Also
a test we made of claims at three Plans indicated           that
claim examiners were doing an adequate job of (1) establish-
ing the eligibility        of CHAMPUSbeneficiaries    and (2) check-
ing the mathematical        accuracy and completeness of the claim
forms.

      CHAMPUSis the only health program, including    the Fed-
eral employees program, Medicare, and private    Blue Cross
health insurance programs, for which the Blue Cross Associa-
tion performs a type of claims review.    We believe that the
claims review procedure performed by the Blue Cross Associa-
tion largely  duplicate procedures performed previously    by



                                 68
Blue Cross Plans, that  they serve little    purpose, and that
consideration  should be given to discontinuing     them.

      Officials of the Blue Cross Association  agreed that
the review procedure may not be needed but stated that
OCHAMPUSrequired    it. An OCHAMPUSofficial   stated that he
planned to look into this matter.




                              69
                                CHAPTER 7

              ADEOUACYOF REVIEWS OF FISCAL AGENTS

        The Department of Health, Education,         and Welfare"s
Audit Agency (HEWAA) audits of the Blue Cross Association
and selected Blue Cross Plans were adequate for determining
the allowability      and allocability     of proposed administra-
tive costs, but the scope of the audits and the time spent
on them were too limited        for evaluating    the reasonableness
of these costs.       We believe that HEWAA, to make this eval-
uation,     should examine into the need for the administrative
services     and determine whether the Blue Cross Association
and the Blue Cross Plans were performing            efficiently   and
effectively     those services     found to be necessary.

      Our review indicated    that HEWAAneeded to expand its
audit work to cover determining      (1) the eligibility       of
CHAMPUSbeneficiaries     and (2) whether hospital        charges to
CHAMPUS beneficiaries      are reasonable when compared with
charges to other patients     for the same or similar        services.

        In October 1967 the Defense Contract Audit Agency,
which has the basic responsibility            for auditing      CHAMPUS
 contracts,    entered into an agreement which provided that
HEWAAreview the handling of CHAMPUSwork by the Blue Cross
Association,      the Blue Cross Plans, and Mutual of Omaha.
This agreement was necessary because HEWAAaudits some of
the same fiscal        agents' handling of the much larger Covern-
ment medical program--Medicare--and            could advantageously
coordinate     the audit work under both programs.              The Defense
Contract Audit Agency manual, which HEWAAagreed to use,
states that, with respect to CHAMPUS, the primary audit ob-
jectives    are to determine (1) whether administrative               costs
claimed for processing         claims are allowable,        reasonable,
and allocable,       (2) whetherhospital      charges are for autho-
rized services       furnished    to eligible    beneficiaries,     and
 (3) whether the charges are reasonable.

      Our review of work performed by HEWAAat the Blue
Cross Association   and at four selected Blue Cross Plans
showed that the scope and quality    of the review work per-
formed was, for the most part, adequate for determining     the
allowability   and allocability of proposed administrative

                                    70
costs.     We took no significant           exception    to the work per-
formed.

        We believe,   however, that HEWAA's work for determining
the reasonableness       of these administrative       costs was not
adequate, because of its limited        scope aid the brief        time
spent on the audits.        For example, we found no documenta-
tion to indicate      that HEMAAhad reviewed and evaluated the
need for the Blue Cross Association's           duplicate    claim re-
view procedure,     the wide variances     in administrative      rates
paid to the Plans for processing        claims, ,or other adminis-
trative    matters discussed in chapter 6.

       We believe also that HEWAA1s audit effort                    to deter-
mine the eligibility       of beneficiaries           can be improved'by
expanding the scope of the audit.                -Tests made by the audit
staffs were performed primarily             to determine the mathemat-
ical accuracy and completeness of the claim form, rather
than to establish      the claimant's         eligibility;          We believe
that, although establishing          eligibility           is primarily     the
responsibility     of the hospitals,          the audit program should
be revised to require       auditors      to determine whether hospi-
tal procedures are adequate for establishing                     the eligibil-
ity of patients      and whether hospital           employees are familiar
with regulations      governing the payment of CHAMPUSbenefits.
We noted only one case where the auditors                    had requested a
branch of the service to confirm the claimant's                       period of
entitlement.

       HEWAAreported that hospital        charges paid by the four
Plans we reviewed were reasonable,         but we found no documen-
tation   showing that HEWAAhad performed any comparative
analyses at two of the Plans.       At another Plan, the method
used to evaluate the reasonableness         of hospital charges ap-
peared to us to be inadequate.        As the basis for this con-
clusion,    the auditors  computed the average charge per day
for 248 CHAMPUSclaims and for 10,362 claims processed in
l-month under five other programs and compared the two aver-
ages.    In our view this method does not provide a sound
comparison of charges for similar         services among the differ-
ent programs within hospitals.        We believe that, to be
meaningful,    comparisons should be made of charges for simi-
lar services by individual     hospitals.



                                       71
       In addition,  we noted some instances where auditors
had not followed    their audit program.    For instance, the
auditors   did not

     --fully   investigate  the causes for a 74-percent  in-
        crease in a Plan's administrative   claim rate from
        1967 to 1968, although the audit program required
        that this be done when the rate increased by more
        than 10 percent,   and

     --test     the adequacy of a PlanIs   procedures   to prevent
         duplicate   payments.

      Our report entitled     "Observations   on Development and
Status of the Audit function       at the Department of Health,
Education,    and Welfare"   (B-160759, May 9, 19691, in com-
menting on the quality     of audits of grants and contracts,
noted similar    weaknesses in the performance of these types
of audits and inadequacies       in the scopes of the reviews.




                                 72
                             CHAPTER8

              CONCLUSIONS, RECOMMENDATIONS,AND

        MATTERSFOR CONSIDERATION BY THE COMMITTEE

CONCLUSIONS

     Costs for CHAMPUShave risen significantly   in recent
years because of (1) expansion of CHAMEUSby Public
Law 89-614, (2) increased use of CHAMEVSby beneficiaries,
and (3) the dramatic rise in hospital  costs.  (See ch. 2,)
     We conclude:

     --That hospital   charges to CHAKHJS patients were gen-
        erally the same as the charges made by the same hos-
        pitals for similar   services to non-CHAMPUS patients.

     --That,     in general,   the lengths of stay for CHAMPUS
        patients    were about the same as those for all other
        patients    covered by insurance but longer than those
        for patients    who were not insured.       Specifically,
        the lengths of stay for maternity         cases varied by
        geographic area and by whether the patient            was hos-
        pitalized    in a military    or civilian   hospital.     We
        believe that there is significant         potential    for re-
        ducing the cost of CBAMPUSby reducing,            in conso-
        nance with good medical care, the lengths of stay
        for maternity     cases,

     --That in most cases CHAMPUSpaid the same, and in
        some cases more, than the amounts paid by Blue Cross
        for its subscribers,    for hospital    care because, of
        the availability,    or nonavailability     of Blue Cross
        formulas for reimbursing    hospitals.

     --That,   because of the    high percentage of maternity
        cases processed under      CHAMPUS--about one third--and
        the general practice     of hospitals   of charging less
        than actual cost for     these cases, hospital    charges
        against CHAMPUShave      been lower than they would have
        been had charges for     such cases been based on costs.


                                 73
      --That increased hospital     costs have been due, primar-
         ily 9  to increases in salary   expense and hospital
         services.

      --That serious problems exist,      which must be solved if
         the attempts to control   rising   hospital costs are to
         have a significant  impact.

      --That management of the hospital    component of CHAMPUS
         needs improvement and that little   or no effort has
         been made to effect economies in several potential
         areas.

      --That the scope of HEWAAaudits has been too limited
         to function     as an effective      tool of management in
         regard to such matters as the reasonableness           of ad-
         ministrative     costs    and hospital    charges, the eligi-
         bility     of beneficiaries,    and the efficiency    of fis-
         cal agents.

RECOMMENDATIONS

      We believe   that   the Executive   Director,   OCHAMPUS,
should consider

      --looking   into the differences    in certain    geographical
         areas between the administrative     costs per claim
         charged by the Blue Cross Plans and those charged by
         Mutual of Omaha and changing fiscal       agents where it
         appears advantageous to do so;

      --requesting   proposals from other commercial insurance
         firms to act as fiscal   agents for the program;

     --investigating        the causes for the differences    in op-
         erating   efficiency      which appear to exist among fis-
         cal agents and taking necessary action to improve
        the operations        of the less efficient   agents;

     --attempting   to obtain for CHAMPUSthe more favorable
        Blue Cross Plan reimbursement formulas for paying
        hospitals in areas where CHAMPUSis not obtaining
        them;



                                  74
     --discontinuing  the duplicate    claim   review   procedure
        of the Blue Cross Association;

     --arranging    with HEWAAofficials  for an expansion of
        the audit   effort and the scope of reviews of CHAMPUS;
        and

     --initiating   a pilot program to determine the feasibil-
         ity and economy of paying CHAMPUSclaims on a pre-
        paid group practice  basis.

MATTERSFOR CONSIDERATION BY THE COMMITTEE

        Reductions in the lengths of hospital         stay would have
a significant       effect   on Federal expenditures     for hospital
care.     Therefore the Committee may wish to consider the need
for an analysis        of the factors   affecting  lengths of stay,
to identify      steps that can be taken to reduce them without
sacrificing     the quality     of medical care.




                                 75
                            CHAPTER9

                         SCOPEOF REVIEW

       Our review was performed during 1970 at OCJMMPUS, Blue
Cross Association,     selected Blue Cross Plans, Mutual of
Omaha, selected hospitals,       hospital   and medical associa-
tions,   areawide  planning    commissions,   and regional offices
of HEWAA.

       The selected Plans were the Hospital      Service of Cali-
fornia   (Oakland),   Colorado Hospital   Service (Denver),   Blue
Cross of Southwest Ohio (Cincinnati),       and Blue Cross of
Virginia   (Richmond).     The Plans were selected on the basis
of volume of CHAMPUSbusiness,       geographic location,    and
the methods used by the Plans to reimburse the hospitals
for services rendered under CHAMPUS.

       Our review included an analysis   of data on hospital
charges and lengths of hospital     stay for randomly selected
cases for CHAMPUS, the Federal employees program--high
option,   and several private Blue Cross programs.    We se-
lected for analyses hospital    claims for seven diagnostic
codes that accounted for about 8,500, or 40 percent,       of the
CHAMPUSclaims processed and paid by the four selected
Plans during the 6-month period ended June 30, 1969.

      We randomly selected CHAMPUShospital         claims paid to
20 hospitals --five     hospitals   under each of the four Plans---
representing     about 34 percent of all the claims at the
Plans under the seven diagnostic        codes.   At each of the
four Plans, we reviewed CHAMPUSclaims and an equal number
of similar    claims under the Federal employees program--
high option-- and one Blue Cross program.         At two of the four
Plans, we reviewed an equal number of similar          claims under
another Blue Cross program that was available          only at those
two Plans.      The diagnostic    codes reviewed are shown in
appendix III.

     We researched current literature   to determine the pri-
mary reasons for the increase in hospital   costs and the




                                76
attempts being made to control     these costs.     We also inter-
viewed representatives   of hospitals    and professional    orga-
nizations  in the medical field.      In addition,   we evaluated
the methods used by the Blue Cross Association         and selected
Blue Cross Plans in arriving     at the administrative     cost re-
imbursement rate claimed.    We evaluated also the adequacy
of recent audit work performed by the HEWAAconcerning
CWAMPUScontracts.

      We   did not evaluate the scope of hospital          care and
hospital     services prescribed     by physicians    or the levels of
hospital    operational   efficiency    nor did we make a detailed
analysis    of hospital   cost-accounting      systems.




                                                                         ..




                                 77
.
                                                                                                                EXHIBIT A


 DOLLARS
                                                                                                                                    DOLLARS
(MILLIONS)                                 TOTAL HOSPITAL PAYMENTS MADE FOR CHAMPUS                                              (MILLIONS)
             150                                                                                                              71      50



                                                                                                                               _    1 40
             140



             130                                                                                                               _    1 30



             120                                                                                                               _    1 20'




             110                                                                                                               -    1 10




             100                                                                                                               -1    00



             90                                                                                                                -!    ?O




              80                                                                                                               -E    10




              70                                                                                                                     70



              60                                                                                                                     60




                                                                                                                                      50
              50



              40                                                                                                                     40



               30                                                                                                                    30
                                                                                                                                      I.



                  20                                                                                                                 20



                   1cl-                                                                                                              10




                   0                                                                                                                  0
                          1957   1958   1959   1960   1961   1962        1963       1964   1965   1966   1967   1968   1969


                                                                    Calendar    Year




                                                                               81
  EXHIBIT B

                                               AVERAGE          TOTAL      CHARGES         FOR           MATERNITY              CLAIM’
                                           PAID    DURING         THE   6-MONTH       PERIOD              ENDED        JUNE        30,   1969

                                              COLORADO H.OSPITAL SERVICE, DENVER, COLORADO
DOLLARS                                                                                                                                                                   DOLLARS

                                                                                                                                                                                    50



                                                                                                                                                      -


                                                                                                                                                                                    130




                                                                                                                                                                                    110
                                                                                                                                                            ..




                                                                                                                                                      .I.‘.,                        190



                                                                                                                                                                  ‘.’
                                                                                                                                                                      :
                                                                                       ,.,::.                                                                    . :
                                                                                       ::...,
                                                                                                                                                      ‘.’
                                                                                                                                                                                    170
                                                                                          .. .
                                                                                       ,.: .:.
                                                                                             .:.
                                                                                          ..,
                                                                                           :.I
                                                                                       ::.
                                                                                       ::.
                                                                                       1::::
                                                                                       ::.                                                                                          1.50
                                                                                            :.
                                                                                            :.
                                                                                       ::.
                                                                                            :.
                                                                                       ::.
                                                                                       ::.
                                                                                       ::.
                                                                                       ::.
                                                                                          ‘.
                                                                                       ::.                                                                                          330
                                                                                       ::.
                                                                                          :.




                                                                                                                                                                                    310




290                                                                                                                                                                                 290




270                                                                                                                                                                                 270




                                                                                                                                                                                    ES0

                                                                                                                                                                                    I


                                                                                                                                                                                        0
                 HOSPITAL            1               HOSPITAL     2             HOSPITAL           3                 HOSPITAL        4          HOSPITAL                  5


                      CHAMPUS                                                         BLUE             CROSS


         ...........
        ..........
         ...........
       .I:.:;.:.::.:.:.:.: FEDERAL       EMPLOYEES      PROGRAM
      f ...........




                                                                                     82
                                                                                                                                                                         EXHIBIT C
                                     AVERAGE                     TOTAL     CHARGES              FOR        MATERNITY                           CLAIMS
                              PAID      DURING                    THE    6-MONTH       PERIOD               ENDED       JUNE                         30,       1969

                                 BLUE CROSS OF SOUTHWEST OH10, CINCINNATI,                                                                            OHIO
DOLLARS                                                                                                                                                                          DOLLAR5
410                                                                                                                                                                                            10
                                                                                         :.
                                                                                        ._
                                                                                        ..
390                                                                                                                                                                                        90
                                                                                        ‘.


370                                                                                     ::                                                                                                 70

                                                                                        :..
                                                                                        :..
350                                                                                                                                                                                        50
                                                                                        ‘.’


330                                                         :                                                                  ‘.I.,                                                       ;30
                                                  .:.,.
                                                                                                                               :
                                                                                                                               :
                                                  _‘_
                                                                                        : ,,
                                                      ‘_..
                                                          ‘.
                                                                                        ::.                                        :b:
                                                          ..                                                                               ‘.


310                                                                                                                                                                                            10
                                                                                        _’
                                                                                        :.,‘_
                                                                                         :.

                                                                                         :.
                                                                                        ‘7.
290                                                                                      .‘.                                                                                               190




a0                                                                                                                                                                                         !70

                                                                                        ‘:
                                                 :.                                     ::.                                    ‘:
                                                                                                                                   ...
                                                                                                                                                 :

                                                                                         :,:
250
                                                      .:.                                :.’
                                                                                        ;:.:.                                                                                              !50
                                                            _’
                                                                                        :::.                                        ..


                                                        ..’                             :                                               ‘.‘.
                                                                                                                                            .,
                                                                                                                                ..,

230                                                                                                                            :.:.:                                                       !30
                                                                                        ,.I.’                                  ::.
                                                                                                                                  ‘.‘.
                                                                                        :::.                                    .‘.
                                                                                                                                           ..
                                                                                        :h:.,                                              :
                                                                                        ::_.
                                                                                          .:                                       ‘.‘.
                                                                                                                                       .-.
210                                                                                      ‘.’                                                                                               210
                                                                                        .:.                                    : ‘.
                                                                                                                                    :.
                                                                                                                                    ‘.
                                                                                                                                    :..
                -                                                                       .’                                         ::

19c                                                                                     _‘_
                                                                                        ..                                              :_.,
                                                                                                                                                                                           190
                                                                                                                               ‘_




170                                                                                                                                                                                        170
                                                                                                                                                                                           I
     I

     0          - .._                            .A                                     A                                                                                                      0
          HOSPITAL      1                 HOSPITAL                  2              HOSPITAL            3               HOSPITAL                            4          HOSPITAL   5


             CHAMPUS                                                                            BLUE       CROSS



              FEDERAL       EMPLOYEES          PROGRAM




                                                                                            a3
 EXHIBIT D

                                  AVERAGE          TOTAL      CHARGES       FOR           MATERNITY           CLAIMS
                              PAID    DURING         THE   6-MONTH      PERIOD              ENDED      JUNE      30, 1969

                                    BLUE CROSS OF VIRGINIA,                          RICHMOND, VIRGINIA
DOLLARS                                                                                                                                    DOLLARS
                                                                                                                                                     150




                                                                                                                                                     130




                                                                                                                                                     110




                                                                                                                                                     390


                                                                             3



370                                                                                                                                                  370




350                                                                                                                                                  350
                                                                             :’


                                                                                ‘.
                                                                             ‘..



330                                                                                                                                                  330
                                                                             ‘..




310                                                                                                                                                  310
                                                                             :.




                                                                                                                                                     290


                                                                             :.



                                                                                                                                                     270




250                                                                                                                                                  PM
                                                                                                                                                     /



                                                                                                                                                      0
          HOSPITAL      1               HOSPITAL       2          HOSPITAL            3               HOSPITAL     4        HOSPITAL   5


              CHAMPUS                                                   BLUE         CROSS



              FEDERAL       EMPLOYEES      PROCRA,,,




                                                                         84
                                                                                                                             EXHIBIT E

                                     AVERAGE          TOTAL     CHARGES        FOR   MATERNITY              CLAIMS
                              pAID       DURING         THE   &MONTH       PERIOD     ENDED        JUNE        30, 1969


DOLLARS                      HOSPITAL SERVICE OF CALIFORNIA,                         OAKLAND,         CALIFORNIA                      DOLLARS
600                                                                                                                                             ioo




570                                                                                                                                             570




540 I-                                                                                                                                          540




510 I ,-                                                                                                                                        510




48C l-                                                                                                                                          480




450 l-                                                                                                                                          450




42CI-                                                                                                                                           420




39C)-                                                                                                                                           390




36( I-                                                                                                                                          360




      )-                                                                                                                                        330




30( l-                                                                                                                                          300




271)-                                                                                                                                           270

                                                                                                                                                7


      (4
       1                                                                                                                                            0
           HOSPITAL      1               HO lSPlTAL     2           HO SPITAL                    HOSPITAL                 HO SPITAL   5


               CHAMPUS                                                    BLUE   CROSS




                                                                           85
                   .           ,
             ,‘.       -:,-:




APPENDlXES




     87
                                                                               APPENDIXI
                                                                                  Page 1


     HAJDRrn HEHBEAS
GEORGE H. MAHOX, TEX..
                   cnum-




                                      October 20, 1969




             Honorable Elmer B. Staats
             Comptroller General of the
              United States
             U. S. General Accounting Office
             Washington, I). C. 20548
             Dear Mr. Staats:
                   In the last several years the cost to operate the military
             Medicare program has increased substantially.    Tne program ~2s
             first instituted  in fisczl year 1957 at a cost of about $2~,500,000.
             For fiscal years 1966, 1967 and 196c7 expenses were ebout $75,616,000,
             @08,676,000 and $162,374,000, respectively.    The preliminary report
             of obligations for fiscal year l$g shows $177,366,000, and the budget
             estimate for 190 is in excess of $200 million,
                   While testimony before the Committee indicates that there has
             been an annual increase in the number of beneficiaries   and an
             increase in the cost of benefits received, it appears that cost
             increases are greater than might be expected and not in proportion
             to benefits derived.-
                   The Committee is interested in ho-zing whether the fees being
             paid participating  physicians, hospitals,    or others for services
             rendered are in line with those which rrould be customarily charged
             to non-subscribers of medical-hospitalization     programs. W would
             also like to know whether any substantial profits have been realized
             by anyone servicing the program.
                   Xe would appreciate the General Accounting Office making a
             comprehensive review of the military Meclicare progr-ramand reporting
             to the Commitiee on its findinSs as soon as possible.    If you so




                                               89
APPENDIX I
    Page 2


  desire, various aqects     may be reported   individually,   with a summary
  report upon completion of all work.       The retiew shoxi!.d include, but
  not necessarily be iimited    to the fcllowing     areas:

        1.   An evaluation  of the reasonableness        of total    cost incurred
             by fiscal years.

        2.   Tne reasonableness     of fees charged and profits        realized   by
             participating   individ-uals,  medical facilities        or other
             organizations.

        3.   T'ne reasonableness       of expenses incurred   in the administration
             of the program.

        4.   A determination       of the eligibility   of participants.

        5.   Tne adequacy of audits made by responsible    government
             agencies of the administration  and operation   of the
             program and benefit  payments made under the program.

                                                        Sincerely,




                                                 90
                                                        APPENDIX II
                                                             Page 1

                            FISCAL AGENTS

     PROCESSING INPATIENT HOSPITAL CLAIMS FOR CHAMPUS

             BY GM)GRAPHIC AREAS OF RESPONSIBILITY



                   THE 52 BLUE CROSS PLANS
           SUBCONTRACTORSFOR BLUE CROSS ASSOCIATION
                                                        Geographic
                                                         area of
      Name of the Plan                  Location     responsibility

Blue Cross-Blue      Shield of
  Alabama                              Birmingham     Alabama
Blue Cross, Washington-                              (Washington
                                       Seattle
  Alaska, Inc.                                       (Alaska
Associated Hospital                    Phoenix       k' lzona
  Service of Arizona                                 (Nevada
Blue Cross of Southern
  California                           Los Angeles    California
Hospital     Service of
  California                           Oakland             11
Colorado Hospital
   Service                             Denver         Colorado
Connecticut     Blue Cross,
   Inc.                                New Haven      Connecticut
Blue Cross and Blue
   Shield of Delaware, Inc.            Wilmington     Delaware
Hawaii Medical Service
  Association                          Honolulu       Hawaii
Idaho Hospital      Service,
   Inc.                                Boise          Idaho
Blue Cross Hospital       Plan,
   Inc.                                Louisville     Kentucky
Associated     Hospital
   Service of Maine                    Portland       Maine
Maryland Blue Cross, Inc.              Baltimore      Maryland
Massachusetts      Blue Cross,
   Inc.                                Boston         Massachusetts
Michigan Hospital       Service        Detroit        Michigan


                                  91
APPENDIX II
     Page 2

                                                         Geographic
                                                          area of
       Name of the Plan                  Location     responsibility

Mississippi     Hospital      and
  Medical Service                       Jackson        Mississippi
Blue Cross of Montana                   Great Falls    Montana
New Hampshire-Vermont                                 (New Hampshire
                                        Concord
  Hospitalization        Service                      (Vermont
Hospital    Service Plan of
  New Jersey                            Newark         New Jersey
Hospital    Service,     Inc.           Albuquerque    New Mexico
Blue Cross of Northeastern
  New York, Inc.                        Albany         New York
Blue Cross of Western
   New York, Inc.                       Buffalo                II


Chautauqua Region Hospital
   Service Corp.                        Jamestown              II


Associated     Hospital
   Service of New York                  New York               II


Rochester Hospital         Service
   Corporation                          Rochester              11


Blue Cross of Central
   New York, Inc.                       Syracuse               t?


Hospital    Plan, Inc.                  Utica                  If


Hospital    Service Corporation
   of Jefferson     County              Watertown              II


North Carolina Blue Cross
   and Blue Shield,        Inc.         Chapel Hill    North        Carolina
Blue Cross Hospital          Plan,
   Inc.                                 Canton         Ohio
Blue Cross of Southwest
   Ohio                                 Cincinnati        tt
Blue Cross of Northeast
   Ohio                                 Cleveland
Blue Cross of Central
   Ohio                                 Columbus
Hospital    Service,     Inc.           Lima
Blue Cross of Northwest
   Ohio                                 Toledo            11


Associated     Hospital      Service,
   Inc.                                 Yourlgstown       11


Blue Cross of Oregon                    Portland       Oregon
Blue Cross of Lehigh Valley             Allentown      Pennsylvania
                                                               APPENDIX II
                                                                    Page 3

                                                                Geographic
                                                                 area of
      Name of the Plan                     Location          responsibility

Capital   Blue Cross                      Harrisburg          Pennsylvania
Blue Cross of Greater                                                       II
  Philadelphia                            Philadelphia
Blue Cross of Western                                                       II
   Pennsylvania                           Pittsburgh
Blue Cross of Northeastern                                                  II
   Pennsylvania                           Wilkes-Barre
Rhode Island Blue Cross
  and Blue Shield                         Providence          Rhode Island
Blue Cross-Blue     Shield
  of Tennessee                            Chattanooga         Tennessee
Memphis Hospital     Service and                                       II
   Surgical Association,      Inc.        Memphis
Blue Cross of Utah                        Salt Lake City      Utah
Blue Cross of Virginia                    Richmond            Virginia
Hospital    Service Association                                   I1
   of Roanoke                             Roanoke
Parkersburg Hospital
   Service,   Inc.                        Parkersburg         West Virginia
Wyoming Hospital     Service              Cheyenne            Wyoming
Group Hospitalization,       Inc.         Washington,         District   of
                                            D.C.                 Columbia
Blue Cross of Puerto     Rico             SanJuan             Puerto Rico

                           MUTUALOFOMAHA

                          Geographic area of
                            responsibility

        Arkansas                                         Nebraska
        Florida                                          North Dakota
        Georgia                                          Oklahoma
        Illinois                                         South Carolina
        Indiana                                          South Dakota
        Iowa                                             Texas
        Kansas                                           Wisconsin
        Louisiana
        Minnesota
        Missouri


                                     93
APPENDIX III


                DIAGNOSTIC CASES SELECTEDFOR REVIEW


Diagnostic
   code                                Description

     660        Delivery    without   mention         of complication

     650        Abortion    without   mention         of sepsis   or toxemia

     634        Disorders     of menstruation

     571        Gastroenteritis and colitis,  except               ulcerative,
                persons aged 4 weeks and over

     560        Hernia of abdominal          cavity     without   mention           of
                obstruction

     550        Acute appendicitis

     510        Hypertrophy     of tonsils       and adenoids

Source :     International    Classification   of Diseases,               1955 Re-
             vision,    World Health Organization.




                                                                   U.S.   GAO   Wash..   D.C.